Emerging Markets Bounce

Author:Mr Ian Stewart
Profession:Deloitte
 
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Sentiment about emerging markets is prone to big swings. From the late 1990s optimism, bordering on euphoria, was the order of the day. That bubble burst more than five years ago.  Since then, but with some conspicuous exceptions, sentiment about emerging markets has become increasingly negative.

China's long-term slowdown, widespread political turmoil, falling commodity prices, and the withdrawal of capital by foreign investors have all played a role. Emerging market equities have taken a hammering and growth has softened.

At the start of this year sentiment hit a new low. The risk of a hard landing for emerging economies, especially China, was widely seen as the biggest danger to the global economy.

Those fears have not been realised. Indeed, while the world has been pre-occupied by Brexit, the US Presidential Elections and the failed Turkish coup, things have started to look up for emerging markets.

Most strikingly investors have turned more positive. Capital flows into emerging markets have risen sharply. In the last six months emerging market equities have risen by almost 25%. Investor demand for the debt of emerging market companies, one of the riskiest of assets, has soared. 

What lies behind this change in sentiment?

The pessimistic interpretation is that emerging markets are the beneficiaries of weak growth and ultra-low interest rates in the West. Brexit, by fuelling uncertainty and pushing interest rates lower has added fuel to the fire. Investors have responded by pulling capital out of the Western markets and putting it into emerging economies where interest rates, growth and returns are higher.

More positive factors are also at work.

Firmer commodity prices, often seen as a harbinger of stronger global growth, have helped emerging market producers. Oil has led the charge, with the price of Brent crude up 34% between the first and second quarters of this year, and metals, timber and many other commodity prices have firmed.

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