emerging markets: Cameron Brandt on implications of rate cut for Emerging Markets?

“Historically, a cut of this size certainly triggers some discussion about whether it is triggered by current economic weakness or a desire to not be behind the curve,” says Cameron Brandt, EPFR Global.

First things first, how is it that one should be reading into this outsized rate cut by the Fed? I mean, is it a sign of a weak economy because clearly the equity markets do not seem to be thinking so?
Cameron Brandt: Well, I think that is the right question to be asked and it obviously would not be answered in a minute. I think and especially from an emerging markets context, a lot is going to depend on how the market judges the size of the cut in the coming days. Historically, a cut of this size certainly triggers some discussion about whether it is triggered by current economic weakness or a desire to not be behind the curve.

And though markets are certainly celebrating, from where I sit, a lot of the good news that this rate cut could cement, i.e. the much hoped for soft landing, is already baked into current prices and valuations. So, I would not be at all surprised to see this burst of enthusiasm fade fairly quickly.

Are we at that cusp where flows compulsively now will start moving back into emerging markets because historically, when Fed has cut rates, that has coincided into a big boom of liquidity into emerging markets?
Cameron Brandt: Well, we have certainly sort of seen a tentative shift on the fixed income side. Emerging markets bond funds have, instead of being hit with relentless outflows, have at least had a few weeks where flows have been positive.

For emerging Asia, the flows certainly from a mutual fund and ETF perspective never left you. Dedicated India equity funds are sort of one week shy of having posted consecutive inflows for 18 straight months, which I think I struggle to remember a dedicated country fund group that has had such a long run.

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