Andrew: Let’s start with investors’ general perception of emerging-market (EM) assets and then drill down. At present EM equities are seen as fairly cheap; rising interest rates in the developed world, especially the US, tend to draw money away from risky assets such as EMs. If inflation (and interest rates) stay elevated because inflation is higher for longer, is it going to be a problem for EMs generally?
Charles: It’s true that higher rates in the US usually reflect a strong US economy, implying that returns available in the US market tend to be better, so money is drawn in.
Note, however, that retail investors in EMs are part of this story too. At a time of high rates they are, correctly, allocating money to fixed-income assets. So when it comes, the shift down in interest rates in EM will see a shift up in equity valuations
