Emerging markets can’t rely on a dovish Fed for much longer: Dovish moves by the US Federal Reserve are having less of an impact on emerging markets, Jonathan Wheatley writes in the FT. The Fed’s decision to leave rates on hold last Wednesday did little to prevent EM indices falling at the end of the week on global growth concerns. JPMorgan’s EM Currency Index fell 1.7%, the MSCI Emerging Market index closed 1% down, and the MSCI Emerging Market ETF tumbled almost 3%. “The incremental bounce that you get from dovish surprises is becoming less and less,” Robin Brooks, chief economist at the Institute of International Finance (IIF), told the FT.

Less impact, less frequency: It’s one thing that dovish announcements are having less impact on emerging markets. But, according to Citi’s chief EM strategist Luis Costa, they are also set to become less frequent. “It is difficult to imagine another sizeable help to EM assets … given that the markets already have a very good idea of the ultimate size of the [Fed’s] balance sheet,” he said last week. Any further surprises, he notes, will be because of a serious decline in the US growth prospects — something that could do more harm than good for risky EM assets.

And overcrowding does not help the situation: A Bank of America Merrill Lynch survey last month found that for the first time ever, emerging markets were the “most crowded trade” following the huge spate of inflows in the opening weeks of 2019. Retail and institutional investors have increased their exposure to EM assets, with year-to-date net fund inflows currently at USD 15.7 bn, against USD 61.8 bn leaving developed markets. And according to IIF analysis cited by Brooks, the falling EM positions of international investors last year was due to falling prices, rather than capital flight. All of this means that EM holdings are sizeable and there may not be much headroom for them to increase. “The basic message is that after all these years, people are sort of risked up,” Brooks says. “For each dovish surprise the incremental flow is less, and of worse quality.”