Emerging market tensions rattle markets

Concerns of emerging economy dislocation, currency depreciation and equity sell offs took much of the global market’s focus over the past month. This was particularly true as trade tensions between the US and China drifted somewhat over recent weeks ahead of a likely re-intensification. Looking ahead, however, speculation will increase as the prospect of US$200bn of tariffs being imposed on Chinese imported goods to the US hoves into view.

Global: EM & DM Equity market total US$ returns
EM equity market sell off defines 2018 as DM recovers


Source: IFM Investors, MSCI, Macrobond

Emerging markets (EM) have turned a very sharp corner over the past year, with tighter US financial conditions taking their toll. This is in the wake of the US Federal Reserve (Fed) increasing its policy rate and the US dollar (US$) strengthening. Looking back, for many emerging economies, 2017 was a stellar year. Investor interest and strong capital inflows were encouraged by solid, and in some cases, recovering and accelerating economic growth, ample global liquidity and low volatility. This fostered an environment that prompted strong investor sentiment that was seeking to take advantage of the synchronous upswing in global growth that emerging markets, amongst the many, were benefiting from.

Indeed, for the 2017 calendar year, emerging market equities returned 38% gains in US$ terms, making the asset class the year’s top performer. In second place, developing market equities returned 26% and, in outright third, US equities returned 22.0%.