Xavier Hovasse, head of emerging equities at Carmignac, is sceptical that the above narrative reflects the reality of markets.
He says qualitative research conducted by himself and his team shows that emerging markets actually perform best when US rates are rising.
Hovasse says this is because US interest rates generally only rise when the global economy is performing well, and demand for commodities and consumer goods is strong.
He says: “We had clients say to us they won’t invest in emerging markets when rates are going up, but we showed them the data – the key is to understand why rates are rising.”
Hovasse's view is that if rates are rising primarily to combat inflation, then the likelihood is that commodity prices will be high, and that will have driven positive performance for latin American equities.
He says if rates are rising to combat higher consumer spending in the US, then this would typically mean that emerging economies in Asia, which export consumer goods to the US, tend to benefit.
Raza Agha, head of emerging markets credit strategy at Legal and General Investment Management, says the impact of dollar strength has been mitigated in recent times by improved economic management in many emerging economies; many of those economies are now able to borrow in their own currencies, and have become better at managing deficits.
Eisinger says policymakers in emerging markets handled the rise in US rates well, as they were able to put their own rates up, offering a measure of protection against the stronger dollar.
This protection occurs because, just as the dollar rises when US rates rise, so the respective emerging market currency rises, and as countries and companies generate the revenue they use to repay the debt.
The narrower the gap between the value of the respective currencies, the more the impact of higher US rates is mitigated.
Historically emerging countries may not have wanted to put rates up when the US did, if they were running significant budget deficits that would need to be financed in future.
The other disadvantage arising from putting rates up in order to keep pace with the higher rates in the US is that it can weaken demand in domestic economies, but many emerging economies are strong enough to sustain higher rates.
Eisinger says policymakers in emerging economies have been waiting for the Fed to cut rates so they can follow suit.
