Why emerging markets are not the place to be right now

investmentnews.com:

The third quarter was a story of dashed hopes in emerging markets, with the unraveling of some of the most profitable trades in the asset class.

A stronger dollar and surging US yields, combined with China’s economic woes, brought it all to a head. Emerging-market stocks just posted their worst quarter in a year, wiping out the majority of 2023’s gains. Currencies aren’t far behind. 

Investors have also fled bonds, with both local- and hard-currency fixed income indexes sliding in the third quarter, according to data compiled by Bloomberg. 

“Emerging markets have been plagued by twin challenges, China and Fed policy,” said Todd Schubert, Dubai-based senior fixed-income strategist at Bank of Singapore. “China constitutes roughly one-third of the emerging-market corporate universe, so its underperformance has been a huge drag on the asset class as a whole.”

Recent losses have come alongside a surge in global volatility, fueled by renewed concern over China’s property crisis and a rise in US Treasury yields. An emerging-market implied volatility index rose as much as 3.33 percentage points over the past week, the most in a year, the data show.

The news out of China has combined recently with renewed pessimism over the outlook for US interest rates. That has sent currencies tumbling in countries that had started to cut borrowing costs, such as Chile and Hungary.

“It was already a pretty painful eight, nine months,” said Sergey Goncharov, a money manager at Vontobel Asset Management. “But, really, the confirmation by the Fed and further appreciation by the market that rates will probably stay for long is really causing some volatility. The past few days have been specifically painful.”

The recent declines are all the tougher