How Long Can Emerging Markets Continue To Rally? For Morgan Stanley, This Is The Key Factor

By Seth Carpenter, Morgan Stanley chief economist

Emerging market assets are having quite a year thus far – so much so that clients are asking whether it is sustainable. For markets and asset prices, the dollar’s trajectory will be a key factor determining the length of the rally. From solely an economics perspective, we think that EM economies are in a fundamentally strong position, which provides a solid basis for the performance to continue. Last year we often wrote about the stabilizing force of central bank orthodoxy and historically high real rates. In that context, growth and inflation have generally done quite well across EM. The Fed’s rate cuts to date have eased pressures on EM central banks, opening the door a bit wider for the virtuous cycle to last. But EM economies are naturally heterogeneous, and it’s worth taking a look across regions.