How Did Emerging And Frontier Markets React To The US Rate Hike In December? 2
A person checking stock market data on a mobile device.

Emerging Markets equities decline

Even though the 25 basis point rate hike by the US Federal Reserve was expected, Emerging Markets equities fell on December 14, 2016. The MSCI Emerging Markets Index was down 0.5% for the day. Among regional indices, the MSCI EM Latin America Index was hurt the most, down 1.4% for the day, while the MSCI EM Asia Index was the least effected, down only 0.2%.

Among individual country indices, the Korea, Colombia, and Taiwan indices were flat for the day on December 14, from a day ago. Indices for European countries Hungary, Poland, and Greece and that for Philippines in Asia ended the day on a positive note. These were the only country indices to have risen for the day. Among all emerging markets country indices, that for Greece recorded the sharpest decline of 4.6%.

While the index for Brazil was down 1.5%, that for Brazil ADR (American Depository Receipts) reported a decline of 3.2%. This difference was due to the appreciation in the US dollar in response to the rate hike, which weighed on ADRs as they are priced in the greenback.

- Advertisement -

Frontier Markets equities not as impacted

Frontier markets equities were not as much impacted by the rate hike in the US as their Emerging Market peers. The MSCI Frontier Market Index was down just 0.1% on December 14 from a day ago. Among the major regional indices, the MSCI FM Latin America & Caribbean Index was down the most, while those for Asia and Africa actually reported a rise.

Among Frontier Market country indices included in the MSCI FM Index, those for Serbia and Kuwait declined the most, while that for Bangladesh and Nigeria reported sizable gains.

Impact of the US rate hike

Regardless of the certainty about the US rate hike, emerging markets generally take a fall when rates are raised. The quantum of outflows depends on the macroeconomic stability of a region or country and the surprise quotient of the hike. It is because of this that the MSCI EM Asia index fell the least, while the EM Latin America Index reported a sizable decline after the announcement of a widely expected rate hike.

Investors in emerging market funds (EEM) (VWO) should always be prepared for some volatility post a change in interest rates in the US. However, in cases like that of December, when the rate hike was not a surprise, the volatility dies down very quickly. Investors in regional and country specific ETFs and funds, though, need to be more cautious because the country’s macroeconomic dynamics can dampen or exacerbate the impact of a change in rate on its equity market.

In the next article, let’s look at what the rate hike could mean for BRIC nations specifically.

- Advertisement -