Investors Turn to Emerging Markets, Odds of a Rate Hike Fall

Brazil and Mexico are among sharpest gainers in emerging markets

Investors seem to be favoring emerging markets as the hope of a rate hike by the Fed in September diminished. The Brazilian Bovespa (EWZ) rose by 1.5% on August 15, while the Mexican index IPC rose by 0.68%. Foreign fund flows to most of the emerging markets are expected to rise with an increase in the carry trade. The low-interest regimes in developed countries enable investors to borrow from these developed countries and park them in higher risk but higher return emerging markets.

Investors Turn to Emerging Markets, Odds of a Rate Hike Fall

US indexes fail to match the rise in emerging markets indexes

The US indexes that were at all-time highs in the previous months have had a flat August. The S&P futures (SPY) only registered 0.67% gains for the month—compared to emerging economies that registered gains over 2%. The Dow Jones Industrial Average (DJI) rose by 1.1% in August. For more details on how and why US markets were scaling new heights in previous months, read S&P 500 Scales New Heights, Investors’ Risk Appetite Increases.

This completes the circle of risk appetite that was initiated during the Brexit vote. Initially, investors went for safe-haven assets (gold in terms of commodities and Japanese yen in terms of currencies) before moving to the relatively riskier indexes. Now, with the rise in the emerging markets over the past month, investors seem to willing to take up riskier positions.

Impact on the market

Looking at the performance of the related ETFs from the beginning of August to August 15, the iShares MSCI Brazil Capped ETF (EWZ) and the iShares MSCI Mexico Capped ETF (EWW) posted significant gains of 4.8% and 8.3%, respectively. The VanEck Vectors Russia ETF (RSX) rose by 2.3% during the same period

The emerging market ADRs (American depositary receipts) were on a positive trend on August 15. Vale SA (VALE) rose by 2.8% for the day, while Petroleo Brasileiro Petrobras SA (PBR) rose by 4.0%.