EM crisis seen as ‘biggest threat to investments’
The deterioration in emerging markets* has been seen across the board in recent months, with Russia, South Africa and Brazil standing out. The ongoing correction in Chinese demand and the resulting decline in commodity prices remain a major drag. EM capital outflows are back as a theme and these mean tighter financial conditions and a likely acceleration in deleveraging.
However, looking forward, there may be also positive signs to be found in EMs: If the Chinese authorities succeed in their attempts to stabilise the economy and there are no major defaults in other countries with excessive credit growth, such as Malaysia, Thailand, Turkey and Brazil, markets could slowly begin to anticipate a recovery in growth. Prices rising from low levels could lead to an improved market sentiment, with appreciating currencies, falling interest rates and a feeling that a growth recovery is getting closer.
*A survey commissioned by NN Investment Partners and carried out by Citigate Dewe Rogerson amongst 104 international institutional investors in December 2015 has found that 33% of them see such a crisis as the highest risk they face, followed by a black swan event (25%), a Eurozone crisis (22%) and the Fed tightening interest rates (22%).
Maarten-Jan Bakkum is senior Emerging Markets strategist, NN Investment Partners