Emerging Markets and Idiosyncratic Risk

Morgan Stanley is betting on improving performance of emerging markets, citing improving asset valuations and widening rate differentials as the key factors. For the past year, growth and decreasing current account deficits are the drove the emerging markets gains this year.

After a good performance for the year, due to underlying confidence in EM reduction in risk factors such as falling commodity prices and reduced anxiety over the outlook for China’s economy, the high-yield currencies of emerging markets are also extremely sensitive to US interest rate hikes. Additionally, there is a multitude of idiosyncratic reasons why assets in the emerging market class have experienced downward pressure in the past weeks.

The markets are considering the mentioned NAFTA worries going forward. Foreign Minister Luis Viegaray cited the possible impact of cooperation with the U.S for security and immigration as a concerning factor.

In South Africa doubts persist on the adoption of policies needed to drive growth, investment and job creation for several years due to infighting in the ruling African National Congress. The power struggle over who should succeed Jacob Zuma as its leader in December and as president in 2019 is proving challenging.

Keith Knutsson of Integrale Advisors stated, ”If the current risk factors in the Emerging Markets are as temporary as they seem, there is exceptional potential for investors.”

An increase in global liquidity could lift emerging markets in the coming weeks. Natural rise in prices of oil should help liquidity, but due to the price increase taking root in tensions within the Middle East the effect has been limited.

This article originally appeared on my blog Here.

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