Eq: EMs

(Istanbul)

The big crash in oil has a lot of investors worried. Generally speaking, falling oil prices are seen as a bad sign, as they tend to forecast a weakening economy. However, this time around, there is a big beneficiary—emerging markets. The large majority of EMs are oil importers, which mean they benefit from weakening prices. Accordingly, countries like India and the Philippines are seeing benefits to their currencies, and likely, their economies. Indonesia and Turkey are also big oil importers.


FINSUM: This is more of a silver lining to a negative than a positive development in itself.

(Istanbul)

The big selloff in bonds has caused a wipeout in emerging markets. The sector, which has seen broad turmoil this year, just witnessed its biggest selloff since March. That fact is quite eye-opening given that the period includes all the worries over Turkey. The big losses have largely been driven by the appreciating Dollar, which hurts EM economies and assets. With the US economy going so well and the Fed likely to increase the pace of hikes, EMs look vulnerable. The MSCI EM Index fell 2% today.


FINSUM: There are some idiosyncratic problems, but EM economies don’t look as weak as this year’s market performance would suggest. It is really US strength that is hurting EM assets.

(New York)

Something very interesting is happening on Wall Street. Just when US outperformance over global assets has been peaking, US analysts are urging clients to move their money into emerging markets. The catalyst for the recommendations is that the Fed’s tightening cycle is getting more intense, which means US equity values might be peaking before a downturn. That, coupled with currently weak emerging market valuations, means EMs seem to have better upside.


FINSUM: We see the argument, but must disagree. There are two reasons why. Firstly, emerging markets have tended to do badly in periods of rising US rates, and secondly, because EMs will feel the pinch of the trade war, which means their economies are likely to be hurt even more than the US’.

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