Post-Election Growth and Fed Rate Cuts Drive EM Local Currency Momentum
November 13, 2024
Watch Time 2:14 MIN
So what are the implications of recent US elections and Fed policy on emerging market bonds? Well, let's break it down. Number one, the elections. The elections mean growth. Tax cuts, stocks are at their highs, and the election's over. That's going to be a relief regardless. And remember, this is in the background of China stimulus. So one implication of the election is very, very growthy.
What's the implication of Fed policy? Well, they cut 25 basis points, as was completely expected right after the election, and the market's pricing in good odds of another cut in December. So they're continuing to cut. CPI is coming, you'll need to watch that. But we think the setup is, unless there are reasons not to cut, they're going to continue. So you have a very growthy world from elections, and you have a Fed that's still cutting.
That's a really, really good setup for emerging market local currencies, which will benefit from the growth as long as you have low duration. And that's exactly how our position has been in our portfolio. A lot of local currency, curated, but very low duration.
One important point I must make about the US election and Fed policy, but mostly about the US election, is Mexico. The Mexican peso has been the dog of local currency all year.
Not owning it has been our best performer. And our view is that it priced the US election. So that's fully priced. There was about a 20% sell-off before the 2016 election in Mexico. And we had about a 20% sell-off going into this election. We don't think the same house is going to be burnt down twice.
And so we've adjusted that. It was our biggest underweight and our biggest outperformer as a result. And we've now gone to neutral.
So that's one important through line from the election to emerging market bonds that's unique. But in general, this has been very, very constructive for our portfolio, especially since we didn't have the one loser, which was Mex peso. And now we think that's the, all of this news is largely priced.
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