Greenspan Lesson Signals Emerging Market Gains: Chart of the Day

Emerging-market assets will rally even as the U.S. Federal Reserve scales back record stimulus if history is a guide.

The CHART OF THE DAY shows that when then-Fed Chairman Alan Greenspan began raising rates in June 2004, the last such cycle in the U.S., the MSCI Emerging Markets Index of equities and JPMorgan Chase & Co.’s emerging-markets bond index had already begun to climb, and were still rising when the Fed rate reached 3.25 percent a year later. Emerging-market stocks and bonds declined in April and May of 2004, anticipating the increase in the Fed Funds Target Rate from a then-record 1 percent.

Developing-nation stocks fell as much as 17 percent after Fed Chairman Ben S. Bernanke told Congress on May 22 the central bank could taper the pace of its mortgage bond and Treasuries buying. The MSCI index has recouped most of those losses amid signs policy makers want to see a more sustained improvement in the U.S. economy before reducing their monthly $85 billion of asset purchases.

“The moment tapering actually starts, everyone is going to say ‘OK, this is out of the way, let’s go and dance,” said Julian Jacobson, who helps manage $150 million in emerging-market assets at Fabien Pictet & Partners Ltd. in London. “In 2004 when Fed Funds started climbing, emerging markets never looked back.”

The JPMorgan bond index is 5.5 percent lower since Bernanke’s May 22 speech. Emerging-market assets have benefited from record-low U.S. interest rates as investors looked abroad in search of higher returns. U.S. 10-year Treasury yields fell to a record 1.38 percent in July 2012. Brazil’s equivalent-maturity bond yielded almost 10 percent at that time.

Developing-country stocks surged 74 percent in the two years from June 2004, outperforming a 15 percent increase in the Standard & Poor’s 500 Index.

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