In late September, having long prepared the markets for an interest rate hike, US Federal Reserve governors voted to defer it. Markets took their inaction as a sign that the US and—since Fed Chair Janet Yellen specifically referenced it—China were in even worse shape than the markets had yet appreciated. Stocks tanked; bonds rallied. It was one of the first times since the financial crisis that stocks did not rise on the prospect of additional or extended monetary stimulus, and we note this for future reference, with trepidation. Could we be observing the edge of the capacity of monetary policy to stimulate the stock market and, by extension, the economy? It was ironic that assurances by Fed governors that a rate rise was still in the works brought about a bounce in stock prices some days later.
EM countries are without question facing strongly negative cyclical pressures. But we do not share the views of some who, in the wake of the declines in EM equities this year and especially this quarter, have expressed doubts about the long-term merits of the asset class. We think these views are too often a case of pointing to cyclical issues but interpreting them as structural declines. It is easy to snipe at weak institutions and policy when growth is weak and corporate profit and market trends are down. Moreover, EM countries are still...emerging. Obstacles sometimes stand in the way of their respective long-term paths to development; recent instances include the fall in commodity prices as well as policy missteps. Many have come a long way since we launched this Strategy 17 years ago, but most all still have much more to do to bring consumption levels of goods and especially services closer to developed-market levels. This is the key reason their equity markets remain a source of compelling investment opportunities.
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