The US Federal Reserve (Fed) raised interest rates by 25 basis points (bp) to a range of 3.75-4.00% on 16 September, its first hike since July 2023. Overnight swaps imply nearly four 25bp increases by the end of 2027, with the Federal Open Market Committee’s (FOMC) dot plot signalling one of these by year-end.

The ten-year US Treasury yield has risen well above 5% for the first time since 2007 and is now around 5.3%. In past cycles, a tightening Fed and an oil shock have led to sharp underperformance of emerging market (EM) assets. This time, so far, the reaction has been muted.

Since the pandemic, the pillars of EM performance have been improved fundamentals, the AI-driven global investment cycle and Chinese disinflation. These have supported EM GDP growth and driven a sharp increase in earnings, while keeping EM inflation anchored. In our view, these factors are relatively insensitive to the Fed’s reaction function. As such, we remain constructive on EM equities and local currency debt and would use the current uptick in the US dollar (USD) and rates as an opportunity to add exposure.