In a previous article, we looked at how emerging market equities had gone from undervalued, with extreme negative sentiment, and strong technicals to less undervalued, extreme bullish sentiment, and less certain technicals. We argued that this presents a short-term hurdle to performance, particularly if it was just a case of a sentiment and positioning driven rally.
Thus, the logical next step is to examine the economic and monetary policy backdrop to assess whether the rally is just a rebound - an unwinding of underweights - or the start of something more enduring.
Monetary policy
A key development for emerging markets is more broader cuts in interest rates as the monetary policy game has become less divergent and more one-sided (14 cuts vs. 5 hikes in 2016 for the top 10 EM countries, compared to 23 cuts and 23 hikes across the 2014-15 period).
Part of the reason why emerging…