What's going on?
As several countries around the world anticipate a year of stronger economic growth, investors in emerging markets (EM) appear to believe that less-developed lands are in for bumper growth too — and their year’s got off to a good start…
What does this mean?
Led especially by Latin American companies, EM stocks jumped by around 1.5% on Tuesday (in USD terms) after delivering total gains of about 35% for investors in 2017 (more than doubly outperforming a comparable measure of stocks in developed economies).
Many firms in export-driven EM (think: Taiwan, South Korea) are benefiting from synchronized economic growth across the globe, while companies in oil-rich countries in South America, Africa and the Middle East stand to gain from recent tailwinds to the oil price. However, a number of economies may not grow as much in 2018 as in 2017 — including China, Brazil and India.
Why should I care?
The bigger picture: An estimated 5-10% of total assets managed by investment firms are in EM!
In the era of near-zero interest rates around the world, investors are likely attracted to the potentially higher returns from EM assets (which are often due to higher risk factors like political instability and currency fluctuations). While rising interest rates in developed economies may cause money to flow back into these countries, the slow path of rate hikes likely to be taken by their central banks shouldn’t cause too abrupt a shift.
For markets: Financial contagion may be a thing of the past for EM.
One problem endemic to emerging markets for decades is the problem of contagion — namely, when a crisis in one EM economy triggers a domino effect and causes financial panic in others. However, problems last year in countries like Brazil and South Korea didn’t spill over into neighboring financial markets — suggesting to some that investors might be more prepared to treat individual emerging markets on their own merits, rather than simply lumping them into a lower-tier group of developing countries.