Real rates in the United States have moved sharply higher since the beginning of 2021. The move has many wondering if emerging market (EM) assets are vulnerable to a repeat of the 2013 “taper tantrum.” EM investments were one of the worst casualties of the taper tantrum, and unlike other risk assets, they took a long time to recover from the initial selloff. While emerging markets remain highly sensitive to global financial conditions, we see five important distinctions that, in aggregate, suggest EM assets are in a stronger position today.

  1. The cyclical position of EM economies today is entirely different. Even prior to the COVID-19 pandemic, growth and inflation were broadly subdued. Growth stood below measures of potential output in countries such as Brazil, Mexico and South Africa, and inflation pressures were limited, with central banks generally achieving inflation targets. By contrast, in 2013, several EM economies were displaying classic signs of overheating—positive output gaps,[i] above-target inflation and excess credit growth.
  1. External positions have improved. The average EM current account balance[ii] has shifted from deficit to surplus since 2013. Several EM countries currently have record trade surpluses. While part of the improvement may be related to the pandemic and transitory, we believe fundamental external vulnerability is lower.
  1. Unlike 2013, EM exchange rates appear undervalued. An index of EM real effective exchange rates ex-China stands 7% below its long-run average, compared to 7% above in May 2013. We view undervaluation as a buffer against further EM currency weakness.