Positive structural case for EM won’t collapse under a few Fed hikes
Lead — Emerging markets (EM) continue to showcase resilience against a backdrop of anticipated Federal Reserve interest rate hikes, which are projected to be three in total by the end of the year. According to Bank of America Global Research, EM equities have significantly outperformed the S&P 500, with returns more than double, signaling strong investor confidence. Per the full note from BofA, this positive sentiment is fueled by long-term capital flows into EM and attractive interest rate differentials, despite a stronger US dollar potentially weighing on these markets. Future trajectories for EM will also hinge on geopolitical stability, particularly in regions like Brazil where political clarity could aid market recovery.
What the desk is arguing
The desk emphasizes that emerging markets are likely to maintain their rally even if the Fed proceeds with multiple interest rate hikes this year. As noted by BofA's David Hauner, compelling long-term flows and a favorable structural environment continue to underpin EM resilience, reflecting a broader systemic shift rather than a mere reaction to US monetary policy.
For instance, the BofA commentary highlights that EM equities have outperformed US markets markedly, with year-to-date returns exceeding the S&P 500's moves. Such data underscores the structural support for EM, particularly through robust demand and shifting investor appetites towards diversification from the US dollar.
Where it sits in our coverage
While we do not have a specific target designated in our internal coverage, emerging market currencies have a fluid dynamic influenced by the proposed Fed hikes and geopolitical factors. According to jpmorgan, their March 2026 target for key pairs is set at 1.10, while bofa is positioned at a more conservative target of 1.04 for the same tenor. The divergence in these targets reflects contrasting views on the resilience of EM currencies against future rate hikes.
How other firms see it
Firms like jpmorgan appear to align with BofA’s bullish sentiment on EM, with both emphasizing strong fundamentals as a cushion against rising US rates, while firms like bofa present a more cautious outlook, forecasting potential headwinds from these rate changes. The mixed perspectives suggest that traders should monitor adjustments in currency pairs such as USD/BRL and USD/TRY, which directly correlate with evolving perceptions on EM stability and US monetary policy.
What the calendar says
Currently, there are no high-impact events scheduled that would directly influence the EM landscape in the next 30 days. Traders might look instead to the broader economic indicators that emerge in the wake of the Fed's rate decisions for any paintbrush strokes on emerging market confidence.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Emerging markets show strong performance amid three expected Fed rate hikes this year.
- 02BofA reports EM equities have outperformed the S&P 500 significantly, reflecting strong underlying demand.
- 03Brazil's political dynamics could either hinder or support EM strength depending on clarity regarding future policies.
- 04Interest rate differentials and sustained capital flows are critical factors in maintaining EM resilience.
Market implications
Traders should monitor EM currency pairs closely, especially USD/BRL, which are likely to react to both U.S. rate changes and local political developments. A break above 1.12 on key EM currencies may indicate a stronger bullish sentiment within this space.
Risks to this view
Key risks include unexpected hawkish stances from the Fed that could lead to stronger dollar appreciation, alongside geopolitical instability related to elections in emerging economies, which could dampen investor sentiment in these markets.
EM resilience tested by Fed, fueled by long-term flows Emerging market equities have more than doubled the S&P 500's return year-to-date, and have held up well despite rising Fed hike expectations and a stronger US dollar. In this episode, David Hauner explains why he remains structurally bullish on EM despite our Economic team’s expectations for three Fed hikes later this year. David discusses how flows over the last decade, interest rate differentials and dollar diversification play into his calculus.
He also addresses the impact and risks that come with U.S. Midterm Elections and AI. David Beker joins for commentary on Brazil, where weaker growth expectations, lower oil and a less favorable rate outlook have flipped the script.
But he suggests that political clarity could help investors to re-engage. "Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. ©2026 Bank of America Corporation.
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