Will EM assets shrug off tighter Fed policy?

We are sceptical that tighter US monetary policy will spell disaster for emerging market (EM) assets. Granted, their prices fell sharply after Ben Bernanke first hinted that the Fed was thinking about scaling back its unconventional stimulus. But that was over a year ago. Since then, the valuations of EM assets have become much more attractive than those of developed market assets, and there are signs that this has begun to entice foreign investors. Indeed, net purchases of EM bonds and equities combined by global mutual funds and ETFs were positive in April and May, whereas they were negative throughout the previous twelve months. We doubt there will be another foreign exodus from EM assets when the US central bank finally begins to raise the federal funds rate, assuming policymakers make it clear that the increase is likely to be gradual and small by past standards.