How will emerging markets emerge from inflationary pressures?

Strong US recovery could impact EM

The strong US recovery and associated reflation pressures may present challenges for parts of the emerging markets universe. This is most obviously visible in US Treasury and, to a lesser extent, German Bund markets. Here, fears that an overshoot in inflation could trigger a change of course by the US Federal Reserve (Fed) - and, to a lesser extent, the European Central Bank (ECB) - have led to some interest rate volatility and a general rise in real and nominal yields this year.

Our ‘working' base case on this matter is that neither the Fed nor the ECB will move suddenly and that current inflation pressures will likely moderate.  Nevertheless, we do see a small but growing ‘tail' risk that the two institutions might react earlier than expected to prolonged inflation pressures. And even if this does not happen, the bond market remains sceptical that inflation pressures are simply temporary. Emerging markets as a whole will struggle A sudden change in direction by the Fed would lead to a change in financial conditions, especially if real interest rates were t...