Emerging-market assets can withstand a more hawkish U.S. Federal Reserve, UBS analysts said, pointing to stronger economic fundamentals and resilient global growth. The bank expects only one more rate increase even as markets price in several, and sees EM equities and currencies holding up better than in past hiking cycles.
The Federal Reserve raised interest rates by 25 basis points at its September meeting, its first hike since 2023, while signalling that rates could remain above 4% through 2027. UBS analysts said in a research note that emerging-market assets are better placed to absorb the tightening than they were in earlier cycles.
Markets were already pricing roughly three further hikes by mid-2027, UBS said, which raises the bar for the central bank to deliver an even more hawkish surprise. The bank itself expects only one additional 25-basis-point increase.
Stronger fundamentals cushion the impact
According to UBS: "we believe they are better positioned to absorb tighter US monetary policy" than in previous hiking cycles. The bank pointed to stronger external balances, improving sovereign credit quality and greater scope for emerging-market central banks to set policy independently of the Fed.
UBS also said the dollar's role as a shock amplifier for emerging markets has diminished, with fiscal concerns weighing against traditional safe-haven demand and support from higher energy prices and tighter Fed policy. For equities, the bank's strategists said resilient earnings, relatively low valuations and continued artificial-intelligence investment should help offset Fed-induced volatility.
Earnings growth and currency risks
UBS expects EM earnings per share to rise more than 60% in 2026 and nearly 20% in 2027. The MSCI Emerging Markets index, meanwhile, trades at about 10 times forward earnings.
On currencies, analysts said Fed tightening is not an insurmountable obstacle to positive returns from high-yielding EM currencies. Narrowing yield differentials, though, make diversification increasingly important. UBS nevertheless flagged rapid increases in U.S. Treasury yields, weaker global growth and geopolitical escalation as key risks to the outlook.
Source: Investing.com
Trading involves risk.
Risk Disclaimer
