Emerging-Market Stocks Climb After Fed Testimony

Emerging-market equities climbed on Tuesday, Feb. 24, after Federal Reserve Chair Janet Yellen testified before Washington lawmakers. Speaking in front of the Senate Banking Committee, Yellen provided greater clarity on the central bank’s current view of economic conditions and offered additional information on the outlook for future interest rate hikes.

Greek developments

Another key development that coincided with this stock rally was news that eurozone finance ministers and Greece obtained greater clarity on the concessions the country will need to make in exchange for its extension, according to Bloomberg. 

After the troubled nation promised to keep selling state assets, overhaul tax collection and combine pension funds, the regional officials agreed to change the timeline for Greece’s current funding agreement, the media outlet reported. While this development coincided with an increase in emerging-market stocks, the statements made by Yellen also played a role, helping fuel investor interest in developing-nation assets.

Yellen statements

She pointed out the recent improvements in economic conditions, emphasizing that the labor market was strengthening and that its recovery was widespread. However, Yellen noted that inflation continues to fall short of the target rate established by the Fed.

She further stated that if the economy continues to strengthen, central bank policy makers will eventually reach a point where they will consider pushing benchmark interest rates higher. However, Yellen emphasized that if this time comes, the financial institution would not necessarily increase rates over the next few months.

Rising emerging-market stocks

After Yellen provided some more in-depth information on when the Fed will increase its benchmark rates, investors responded by pushing emerging-market equities higher, according to Bloomberg. The MSCI Emerging Markets Index increased 0.4 percent to reach 987.89 in New York. Shares of Greece-based financial institution Piraeus Bank SA spiked 20 percent, while the stock of National Bank of Greece increased 17 percent.

“Emerging markets become a little more attractive in this environment where there may be a very slow approach to rate increases,” Walter Hellwig, who works for BB&T Wealth Management in Birmingham, Alabama, told the news source. “The first rates increase is still going to be data-dependent and it’s still a question what the growth trajectory is here in the U.S.”

Nobody knows exactly when the Fed will opt to start pushing benchmark rates higher, and this situation makes the outlook for global equities – including those representing companies in emerging-market nations – uncertain.

Equity rally

Despite this situation, stocks of firms in these developing countries have risen 3.3 percent so far this year, amid announcements that the European Central Bank would engage in further stimulus, according to Bloomberg. These securities are trading at multiples significantly lower than their counterparts in more developed countries. While the MSCI World Index of developed-nation stocks has risen to 16.7 times the estimated earnings of its component companies, the value of the MSCI Emerging Markets Index trades at 11.8 times.

Investors interested in stock trading might benefit from knowing about the situation for these global equities, as being aware of the differences between the markets of developing nations and emerging-market countries could help them increase the chances of meeting their objectives.