EM & APAC Equity Strategy "How much to worry about rising US yields?" Tirumalai

Research evidence excerpt

EM & APAC Equity Strategy "How much to worry about rising US yields?" Tirumalai

for equities performance - we studied the

relationship between US yields and EM equities over a 20-year period. Our key learnings:

1) Nominal US yields themselves carry very little signal for equities - their components

(real yields + breakevens/inflation-expectations) are more useful. Unfortunately, no EM

has the kind of deep inflation-indexed bond market like the US - to study these for EM

local bonds. 2) The relationships have changed significantly over time. US breakevens

had the dominant signal for much of the last 20 years: positive relationship wherein EM

equities did well with rising inflation expectations - especially when such expectations

were driven by demand/growth drivers that helped EM corporate profits with EMs

having heavier commodity and cyclical tilt. But breakevens have largely become

irrelevant post-COVID with the composition of EM changing, and the nature of

inflationary impulse over the last few years being supply-driven rather than demand-led

(Figure 4HowhastheinfluenceofUSyieldsonEMequitieschangedovertime?Overa20-yearperiod,USbreakevenshavehadsignificantimpactonEMreturns,whilerealyieldshavehadlitleimpact.Butthatstorychangeswhenwesehowthesehavechangedovertimewithinthis20-yearperiod.Pre-COVIDperiodwaswhenbreakevenshadsignificantsignal,andtheyhavelargelybecomeirelevantpost-COVID.).

Real rates matter - but the relationship has changed over time

3) Real rates are actually more impactful now than break-evens - but that's

because their influence has not really faded away post COVID.4) Importantly -

about 10 years ago the direction of relationship between real rates and EM equities

flipped: they now firmly hurt when rising (vs helping earlier). That's probably to do with