Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest for the past six decades.
Last week’s “jumbo” 0.5 percentage point cut in interest rates by the US Federal Reserve has sent a nervous thrill through global stocks. However, it could signal a much-needed recovery in emerging markets funds after a difficult three years.
Markets are unsure how to interpret the bigger-than-expected move. Does the Fed’s first reduction in its “funds” rate in four years signal everything investors want in a US “soft landing” – inflation under control, an easing in financial pressures and a gentle slowdown in the world’s largest economy?
Or does the bold move reveal the central bank’s anxiety that it has been slow to act, and that the US will shortly fall into recession like it did in 2001, 2007 and 2020, when the Fed previously began a rate-cutting cycle with half a percentage point chop?
This is an important question for all types of investment, whether equities or shares, real estate, bonds or infrastructure. However, no asset class is on tenterhooks quite as much as global emerging markets.
Historically, emerging markets in Asia, Latin America, Africa, Middle East and eastern Europe have struggled when the Fed has hiked the cost of borrowing because much of these countries’ debts are in dollars and have become more expensive to repay.
Foreign investors also tend to pull their money out of emerging markets companies when US rates rise. They assume these regions’ high rates of growth from increasing prosperity and modernisation will falter as the dollar strengthens with the US economy, weakening currencies and making the countries vulnerable to inflation.
Over the long term, however, the busts and booms of interest rates and currencies have not diminished the fundamental attraction of backing resource-rich countries with young populations and expanding middle classes.
For example, Templeton Emerging Markets (Temit), the biggest and oldest investment trust in its sector, has delivered a magnificent total return to shareholders of 3,873pc since it launched in 1989, way ahead of the 1,729pc offered by its benchmark index, the MSCI Emerging Markets.
Recent returns have been weak, however. After a blistering recovery from the pandemic, emerging markets funds endured three body blows. First the sanctions against Russia for its invasion of Ukraine forced fund managers to write down Moscow-listed stocks to zero. That conflict sparked global inflation, forcing a panicky Fed to raise rates from near zero. Meanwhile China, the biggest emerging nation, saw its stock market plunge 27pc due to a government clampdown on technology companies and a weak recovery from the pandemic.