Just a couple of months ago, emerging-market assets were all the rage as inflation eased and interest rate-cut bets surfaced. The trade has all but fizzled out.
The rapid change has come about as oil rallied some 30% from the year’s low to alter the dynamics for developing nations. Costlier crude is reviving price pressures and damping hopes that interest rates will fall, while threatening to undermine the fiscal balances of energy importers.
It’s a shift that may upend the wagers of emerging-market bulls who had started the year on a high note. From Indian bonds to the Hungarian forint and the Philippine peso, developing-nation assets are looking increasingly vulnerable as the US vows to keep borrowing costs higher for longer and oil barrels toward the $100 mark.
“It is clear that the disinflation trend in EM ex-China has already faltered,” said Jon Harrison, managing director for emerging-market macro strategy at GlobalData TS Lombard in London. “Oil prices are certainly a material part of that, but food prices, a stronger dollar and less disinflation from China are additional drivers.”
The cracks are starting to show. A Bloomberg gauge of emerging-market government bonds and an MSCI index of developing-nation currencies are both closing in on a second month of declines. Hedge funds boosted their bullish positions on WTI to the highest since February 2022 on the back of higher prices, while JPMorgan Chase & Co. added to predictions of an “oil supercycle.”
Economies which are dependent on oil imports and those where crude accounts for a high percentage of household income will be the worst off, Tellimer strategist Hasnain Malik wrote in a note. These include India, the Philippines, Pakistan, Jordan, Kenya and Morocco.
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