After a year of double-digit returns, one of the key questions for emerging markets in 2018 is whether they will continue to be insulated from one another’s crises.
Contagion, an intrinsic feature of the sector for years, shrank to such an extent that an almost 10 percent drop in Brazil’s currency in a single day in May had little effect on its emerging market peers.
Was that proof investors now treat individual emerging markets on their own merits, rather than as members of a homogenous poor and crisis-prone bloc? Or was it just a function of central bank money-printing and near-zero interest rates?
Not too long ago, a selloff like that of Brazil's real currency BRL= on May 18 last year would have sent central banks in distant Asia and Africa scrabbling to defend their markets via interest rate rises or dollar sales.
Instead, its Latin American neighbor Chile cut interest rates with little weakening in its currency, CLP= while in the Middle East, Oman announced plans for a dollar bond.
“Back in 2000, if Philippines sold off in the Asian morning, it meant Russia would sell off in the London morning,” said Steve Cook, co-head of emerging debt at PineBridge Investments.
Cook said his fund did not exit Brazilian markets on May 18, opting instead to shuffle the portfolio towards companies which would benefit from currency weakness.
“Brazil sold off because of political uncertainty but we knew it doesn’t impact Colombia or Peru from a macro perspective.”
“The single-largest driver of EM performance is and will continue to be - growth. As we are seeing synchronized growth recovery, that’s what is underpinning relatively low contagion,” said Polina Kurdyavko, co-head of emerging markets at BlueBay Asset Management.
Thai
Eng