In recent research released by the Federal Reserve Bank of San Francisco and echoed in statements by several Fed regional bank presidents, Fed officials have voiced concerns that the market is underestimating the probability and timing of a change in monetary policy.
When looking around the global fixed income landscape, investors searching for income potential have essentially two choices: non-investment grade debt or emerging markets (EM). While high yield flows continues to dominate the headlines, emerging markets have generally flown under the radar in recent months. In this discussion, we focus on how investors may be able to best position against a change in Federal Reserve (Fed) policy while maintaining income potential from investments in emerging markets.
In 2013, emerging markets were the laggards of the global equity markets. 2014 has seen some bright spots, but various uncertainties, most notably with respect to Russia, have tended to constrain equity rallies. However, there is one market that seems to have completely shrugged off 2013 concerns and emerge as an extremely strong performer thus far this year.
Since bottoming July 1, the U.S. dollar has mounted an impressive rally against virtually every major foreign currency. While many analysts have been predicting a secular appreciation in the U.S. dollar on account of stronger economic fundamentals, the current rally has caused even casual market participants to take notice.