BNP: Schwellenländer geraten in den Fokus

The year may still be young but a new concern has already taken centre stage: out with the endless debates over Fed tapering, in with the focus on emerging markets. Triggers include Argentina’s decision to stop supporting its currency and, more importantly, worries about a Chinese trust fund defaulting. One consequence was a major sell-off in emerging bond, currency and equity markets. Another was policy reaction with monetary policy tightening to stabilise the currency and to fight inflation.

This combination exposes domestic demand to a double whammy of higher import prices and higher interest rates, whereas the competitivity of the export sector gets a boost from the cheaper currency, provided inflation is under control.

Investors have been quick to discriminate between countries by rewarding those taking ‘appropriate’ policy actions. So contagion should be less of a risk going forward. Yet worries linger. Will some Chinese trust funds default after all? What is the impact on economic growth of tighter conditions in the Chinese shadow banking system? Several countries (India, Indonesia, Turkey, Brazil, etc.) have elections this year. How will politics influence economic policy? Investor unease over these factors translates into attractive valuations of the asset class.

Close monitoring of the catalysts for change is recommended in deciding when to move back in. Inflation, the state of the current account and growth momentum are of key importance in this regard.

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