Exposure rates of the Dorval Asset Management Range – 26th February 2021

With US long-term rates surging at a faster pace, the theme of excess is making an appearance on the markets. 

We have often discussed this theme in terms of equity valuations, investors’ positions and portfolio rotation into more cyclical stocks, but what about the emerging markets that have traditionally been exposed to these matters of stability? The context is crucial here: the surge in long-term rates is first and foremost a result of investor optimism, which is shored up by the vaccination campaign and prospects of the economy opening again, along with massive rescue packages – particularly in the United States – and the resilience of the world economy despite the pandemic still persisting. However, the speed at which long-term rates are normalizing is a source of volatility, with the recent trend dominated by real interest rates, while the projected inflation component is decreasing slightly, pointing to a shift in expectations on US monetary policy.


It is crucial to make an immediate distinction between geographical regions. The view of emerging markets as a single consistent whole has definitively disappeared with the Covid-19 crisis, and at the very least, Asia stands out from the others. Looking to the most fragile emerging markets – the former ‘fragile five’ India, Indonesia, Brazil, South Africa and Turkey – the parallel that has been drawn with the 2013 taper tantrum when the Fed announced the halt to its asset purchase program looks overstated in our view. On the one hand, the Fed has not altered its monetary policy direction – unlike in 2013 – while on the other hand, these countries’ macroeconomic weakness have lessened considerably, particularly as regards the balance of payments. However, since the start of the year, emerging currencies have been on the back foot as compared with the dollar. Surprises on growth have come from the US, where there are swifter upgrades due to the massive fiscal program put forward by President Biden. Once this process is complete, the real reopening of the economy over the months ahead will be better news for these countries’ currencies against the dollar.


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