More hot jobs data on Friday pushed the benchmark for global borrowing costs, the 10-year U.S. Treasury yield, to its highest level in two years, prompting even more gnashing of teeth among investors. fund managers from emerging markets who are already having a difficult year.

Deutsche Bank analysts point out that while some currencies managed to save face here and there, anyone taking the currency hedging approach would have seen only one year that started out worse than this- here since 2010.

The Fed tightening was not bad news for all EM assets, however.

Emerging market stocks as measured by MSCIEF’s 25-country MSCIEF are flat for the year, meaning they did 5% better than their developed market counterparts, which is more of a trend according to analysts at Morgan Stanley.

“The outperformance of emerging markets (equities) after the first (Fed) hike is notable,” they said, noting that in Fed hike cycles since 1980, the MSCIEF has risen 17% on average six months after the first rate hike.

Morgan Stanley analysts have yet to call for “buying emerging markets,” but they say “it suggests the time to be more bullish on emerging markets is approaching.”

The massive outperformance of Latin American equities in January could be a harbinger of further gains from emerging markets.

(Chart: Emerging market stocks vs. US rates, https://fingfx.thomsonreuters.com/gfx/mkt/akpeznebevr/Pasted%20image%201644004392617.png)

A bright side to China’s stock market rout last year is that many investors believe they have a good chance of rebounding this year as authorities there once again provide support for the economy.

Swiss-based European fund heavyweight Pictet raised its view on Chinese stocks to “positive” this week on the backing, and because they would likely provide good cover in the event of a military conflict. large-scale Russian-Ukrainian.

“Chinese equities could recover from last year’s declines and narrow the valuation gap with their peers in the coming months,” said the company’s chief strategist Luca Paolini.

(Graphic: Chinese stocks tentatively recover, https://fingfx.thomsonreuters.com/gfx/mkt/zdvxoanempx/Pasted%20image%201643806581616.png)

DOLLARS

However, a more aggressive tightening cycle from the Fed and other major central banks could quickly rekindle pressures in bond markets, said Jonny Goulden, head of local emerging markets and sovereign debt strategy at JPMorgan. .

The “taper tantrum” shock of 2013-14, when the prospect of reduced post-financial crisis support from the Fed hit emerging market assets hard, still haunts emerging market veterans.

Returns for JPMorgan’s hard-currency emerging markets bond index, EMBI Global Diversified, are -2.6% year-to-date, while those for the benchmark fixed-income index in local currency are 1%.

“The Fed’s tightening cycle remains front and center in emerging markets, but so far this year those pressures are curiously materializing in credit rather than local markets,” Goulden said in a note to clients on Friday. .

“We would normally expect these forces to lead to greater dollar strength, but emerging market FX spot yields (year-to-date) are +1%.”

Capital flow data confirmed this trend, Goulden added, saying short-term fund flows had also changed, with local emerging-market bond funds pulling in more than $1 billion while currency funds strong suffered outflows of $2.3 billion to start 2022.

Deutsche Bank said that since 2013, Mexico, Poland, the Philippines and Hungary are the emerging markets most correlated to rising US yields, when looking at their local 10-year benchmarks.

“During large moves, we see that all countries (except China) provided negative returns during periods of extremely bearish moves in US Treasuries,” Deutsche analysts said, showing that bonds from Turkey, Philippines, Mexico and Peru suffered the greatest losses.

Given their expectation of a 10-year US yield at 2.25% by the end of next month, DB analysts imply a currency-hedged yield for emerging market fixed income that would outperform in fact treasury bills on a “total return” basis taking into account all currencies. movement.

“However, that still wouldn’t necessarily be a strong buying argument at this point,” they said. “We recommend that despite recent underperformance, investors maintain a more cautious approach on the asset class.”

(Graphic: EM feels Fed strength, https://fingfx.thomsonreuters.com/gfx/mkt/znvnejlwbpl/Pasted%20image%201644002336846.png)

(Reporting by Rodrigo Campos in New York and Marc Jones in London; Additional reporting by Karin Strohecker in London; Editing by Matthew Lewis)