(Bloomberg) — The Federal Reserve’s most aggressive policy tightening in two decades is sucking emerging markets into a “sell everything” slump, not even sparing assets that should do well when interest rates rise.

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Take value stocks. Shares of mature companies with high dividends and cheap valuations are finding a bid in the U.S. and Europe, where investors are switching to them from more expensive equities in fast-expanding sectors like technology. But this so-called growth-to-value rotation is failing to happen in developing nations, where both types of stocks are falling in tandem.

The contrast suggests emerging markets may extend their underperformance against U.S. stocks into a fifth straight year. While past hiking cycles have coincided with rallies in developing nations, this time may be more challenging because the Fed hasn’t tempered its tightening with accommodative rhetoric like it did in, say, 2016. In fact, liquidity is drying up around the world, leaving investors with little appetite for even bargain stocks.

“This goes back to the basic emerging-market investment philosophy: You generally don’t want to be long EM until the Fed’s basically done,” said Nick Colas, co-founder of DataTrek Research.

Value stocks are typically favored at the start of tightening cycles because their superior earnings and dividend yields help investors to cushion the impact of higher borrowing costs and the consequent reassessment of equity valuations. But now, that connection is broken. The MSCI EM Value Index has tumbled 13% in the past three months, only slightly better than a 16% decline in the corresponding gauge for growth stocks.

History tells a different story. During the 2004-2007 Fed tightening cycle, the value stocks gauge soared 216%. In the two years through January 2018, its 61% rally coincided with Fed hikes.

A key factor behind the indiscriminate bearishness now is the dollar’s strength. The greenback imposes the same currency risk on all securities, irrespective of relative valuations. That leaves traders little room to distinguish between them, especially when the U.S. dollar has surged to the highest level since 2016.

Commodity Reversal

Top components of the value-stock universe, commodities and finance, have begun to wobble. The Bloomberg Commodity Index has been trending lower since an April 18 peak, while oil is down 13% since early March. Traders are unwinding their bets on commodity-dependent currencies, bonds and stocks, leading to a 6% drop in capital flows into the developing world over the past five weeks.

“Emerging-market flows tend to follow the strength of the dollar,” Art Hogan, chief market strategist at National Securities, wrote in an email. “That has been moving higher and putting a major dent into fund flows.”

Fresh outbreaks of Covid in China — and the nation’s stringent policy to contain them — have raised the specter of faster inflation and slowing growth in the world’s second-biggest economy. That could undermine demand for everything from raw materials to bank loans, dragging down corporate performance.

“Headwinds prevail as the sharp rise in U.S. Treasury yields and the earnings downgrades in China are taking money and risk appetite away from emerging economies,” said Leonardo Pellandini, equity strategist at Julius Baer. “Margin pressure will continue and high inflation will make it hard to pass through costs to the consumer, while global growth guidance is significantly lower.”

Meanwhile, interest rates aren’t going up everywhere. China, which typically accounts for a third of emerging-market indexes by weight, is cutting rates in response to to the economic hiccups. Other nations like Brazil are nearing the end of their hiking sprees. That reduces the need for value rotation in these markets.

“Value rotation in emerging markets is working this time around in a very different frequency,” said Darshan Bhatt, deputy chief investment officer and co-founder of Glovista Investments. “When you look at the interest-rate cycle, emerging market countries are in a very different cycle than developed markets.”

Here are the main things to watch in emerging markets in the week ahead:

  • Chinais ’s exports likely saw a significant setback in April due to the lockdowns in Shanghai and other parts of the country; Imports likely stayed weak on sluggish domestic demand and lockdown disruptions

  • Russia is set to report inflation accelerated further in April in the wake of sanctions, adding to pressure on households

  • In Mexico, inflation is expected to extend its uptrend in April, climbing further above the target. The central bank is likely to accelerate its tightening cycle by increasing the benchmark interest rate to 7.25% from 6.5%

  • Peru’s central bank is poised to continue slowly increasing interest rates despite risks of falling behind the curve

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