ab9 January 2024Global Research and Evidence LabGlobal StrategyWhat happens to EM when the Fed starts easing?History may not repeat, but it often rhymesSentiment towards EM has improved rapidly since November amid growing expectations of an impending Fed easing cycle. In this note we look back at the last six Fed easing cycles (since 1989) to observe how global and EM assets typically perform into and after the first Fed cut of the cycle. Studying the different fundamental and valuation contexts at the time, we outline implications that we think will help navigate the road ahead. See page 2 for our key conclusions.Key questions fielded in this note:- How does the strength in EM & risk assets through '23 compare to the onset of prior Fed easing cycles?- Who has benefitted more from Fed easing - EM or DM? - What variable has helped predict whether EM will outperform?- How do EM fundamentals today compare with previous Fed cycles?- Which equity markets and sectors enjoyed Fed easing the most historically?- Does global fixed income keep rallying, or is the best behind us?- How did return profiles differ depending on whether the US entered recession?This report has been prepared by UBS AG London Branch. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES, including information on the Quantitative Research Review published by UBS, begin on page 13. Global StrategyEmerging MarketsManik NarainStrategist manik.narain@ubs.com +44-20-7568 3635Rohit AroraStrategist rohit-b.arora@ubs.com +65-6495 5232Roque MonteroStrategist roque.montero@ubs.com +1-203-719 2112Nimrod MevorachStrategist nimrod.mevorach@ubs.com +44-20-7567 0779Bhanu BawejaStrategist bhanu.baweja@ubs.com +44-20-7568 6833Sunil TirumalaiStrategist sunil.tirumalai@ubs.com +91-22-6155 6080Teck Quan KohStrategist teck-quan.koh@ubs.com +65-6495 4416 Global Strategy 9 January 2024ab 2Executive SummaryUBS expects the first Fed cut in March. Looking across previous Fed easing cycles over the past 35 years, we outline 5 market implications that we think will help navigate the road ahead.The rally in risk assets over the last 6-12m has been atypically strong relative to the onset of prior Fed easing cycles. US equity returns (+23%) over the last 12m, for example, have been almost twice as large as their average leading into prior easing cycles. And US HY credit spreads, in contrast to their historical tendency to widen ahead of Fed easing, have contracted by ~100bp over the last 12m. At 210bp over the next 2 years, markets are pricing 70% of the typical decline in policy rates that the Fed historically delivered, even though these episodes included recession that clearly isn't being priced today. As such, while continued supply-driven declines in US rates/inflation are an upside risk for EM assets again this year, we think markets may have front-loaded much of the boost from Fed easing. This message would be c...
