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Why the “non-event of QE ending” is bullish for EM, especially EM bonds

After prior Fed Chairman Bernanke first mentioned tapering of the Fed’s asset purchase program in May 2013, we finally saw the end of the program on October 29. Since the end was so well-telegraphed and expected, EM bonds and equities actually rallied that night. We welcome the end of the multi-year QE program as it indicates an improved US outlook, which is unequivocally positive for global demand and export-oriented EM countries. Although investors remain focused on when the Fed will begin to increase interest rates as the economic recovery gains traction, we expect the global liquidity picture to remain benign as the European Central Bank and the Bank of Japan still have ongoing bond purchase programs.

Now that the “fear” of US QE ending is behind us, we expect investors to once again focus on the attractive investment opportunities in EM, especially in EM fixed income. EM government and corporate bonds offer significantly higher yields because the underlying country’s higher growth rate necessitates higher interest rates than the near-zero interest rates in slow growth developed countries. These higher yields are even more attractive when considering the strength government and corporate balance sheets. We expect that as the US yield curve begins to normalize over the next several months, because it is a reflection of a recovery in the US economy, we will not see a repeat of the May 2013 pullback in EM fixed income rather we will see increased flows in to EM fixed income to take advantage of the higher bond yields.

Source: The Excel Investment Counsel

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