In principle, the history of Fed hiking cycles has shown that capital flows into EM can hold up if rising rates do not come as a large surprise (as in 1994) and coincide with a robust outlook for global, and thus EM, growth (as in 2004). 

Whether these conditions are fulfilled this time around is uncertain. Although the expected Fed hike in December can certainly not be a surprise to anyone, there are uncertainties about the pace of hikes, and the gap between market pricing and Fed's guidance could still trigger some volatility. Importantly, the ongoing US recovery, driven by service sector-centred consumption does not seem to support EM economies as past US recoveries have. Past recoveries were typically stronger, fuelled by credit expansion and more manufacturing- and trade-intensive, typically supporting commodity prices. Similarly, the modest recovery in Europe has not had much effect on EM growth thus far despite the euro area's higher trade share and its industries' tighter supply chain connection with EM economies. 

This leaves a heightened risk for capital flows to EM economies to dry up further after the Fed lifts off. In turn, this would exacerbate the balance sheet stress and tighten financial conditions in the more dollar-leveraged EM economies, weighing further on their growth performance and possibly leading to a vicious circle of underperforming growth and capital outflows. The threat of such a scenario would likely rise should, in addition to rising US rates, China experience renewed volatility.