Emerging Markets

Warning: EM bounce will be short-lived

Jason Lee | Reuters

Emerging markets are expected to enjoy a relief rally as the Federal Reserve delays the inevitable hike in interest rates, but avoid chasing it, say strategists, as gains are likely to be fleeting.

"I think in the short-term, emerging markets will be supported because the Federal Reserve didn't tighten. Basically, there's little bit less pressure for U.S. dollar to appreciate, a little bit more liquidity," said Viktor Shvets, head of Asian strategy at Macquarie Securities.

"There'll be some relief particularly, in places like Indonesia, Malaysia, up to places like Brazil, South Africa, Russia. Will it last? The answer is no."

The U.S. central bank on Thursday held off on raising rates amid heightened "uncertainties abroad," including China's economic weakness as well as sluggish inflation at home. A rate hike would have ended a nearly 7-year-old zero interest rate policy.

Despite the weak lead from Wall Street overnight, Asian emerging market stocks clocked modest gains on Friday. China's , Indonesia's Jakarta Composite and Vietnam's VN Index traded up between 0.4 and 0.9 percent. The broader edged up 0.7 percent.

To be sure, some remain optimistic about the long term growth prospects of emerging market economies.

"There will be bumps, there will be ups and downs and they are not a problem, they are normal part of development of an economy," Tidjane Thiam, Chief Executive Officer of Credit Suisse told CNBC in an exclusive interview.

Thiam also noted that economic fundamentals in China remain strong.

"We want the Chinese economy to be integrated in the financial system. that means like any other economy, depending on actors' expectations, money will go out, money will go in. To paint that as a crisis, it's more of a normalization," Thiam said.

One reason the bounce in emerging markets will be short-lived is because the U.S. dollar is likely resume its uptrend within a matter of days as investors shift their focus to a potential rate hike in October or December, says Uwe Parpart, director and head of research at Reorient Financial Markets.

Where to invest in emerging markets: Pro
Where to invest in emerging markets: Pro

"You'll see the dollar resuming its strengthening trend as early as next week. The FX markets don't just look at present values, they look out to the next 3-6 months, during which time we'll almost certainly see rates up by 25-50 basis points," Parpart said.

A stronger dollar is negative for emerging markets as it puts downwards pressure on their currencies while increasing their debt burden since a significant portion of their borrowings must be repaid in dollars.

Another reason gains in emerging market equities will prove temporary, is because the Fed kicking the can down the road doesn't change their longer-term dynamics, adds Steve Brice, chief investment strategist at Standard Chartered Bank's wealth management unit.

Read More Chart: How well buffered are EMs now?

Emerging markets are grappling with a range of headwinds, from China's economic slowdown to falling commodity prices, which are constraining their growth.

What could be game changer for emerging markets, however, is a fresh round of stimulus out of China, says Brice.

Fiscal, as opposed to monetary, stimulus would prove more beneficial for equity markets as the former has a more immediate impact on the economy, Brice noted.

"With the Fed set to hike at some point in the coming months, that's the key variable," he said.