Don’t get carried away: time for a considered approach to emerging markets

18 Oct 2016

Emerging markets have been a popular choice for investors fleeing the political uncertainty surrounding their developed counterparts following Brexit. However, should asset owners contain their excitement? Lynn Strongin-Dodds finds out.

“Over the last three years, the global environment, combined with political and geo-political issues, has not been kind to EM. Many of the same macro and regional risks persist today. However, there are clear signs of stabilisation.”

Jim Craige, Stone Harbor Investment Partners

After years in the wilderness, emerging markets (EMs) are back on the investment roster as investors continue to search for yield in this quantitative easing (QE)-fuelled world. EM stock, bond and currency markets have hit new highs but investors are advised to temper the enthusiasm and be discriminating in this heterogeneous sector.

The change in sentiment has only happened within the last six months. In February these markets were reeling as oil and other prices slid, China, once the economic powerhouse, devalued the renminbi, geopolitical tensions spiked and fears of multiple Federal Reserve interest rate hikes abounded. Fast forward to today and these concerns have dissipated somewhat with the MSCI Emerging Markets index up 13% as of mid-August, far outpacing the 4.2% advance ratcheted up by its world index equivalent which tracks developed stocks.

The EM bonds and currencies are also generating better returns than their developed counterparts where there are around $13.4trn of bonds yielding less than zero thanks to central bank activity in Japan, Europe and most recently, the UK.

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