Amid the volatility that has characterised emerging markets through much of 2015, it is worth occasionally reminding ourselves that not so long ago the picture was a much rosier one.
As recently as early 2013, emerging markets were the ‘darlings’ of investment, when some pundits waxed lyrical about ‘decoupling’.
But others pointed out that the suggestion that emerging economies had become masters of their own destinies had already been comprehensively debunked.
It has been something of a rollercoaster ride ever since, with the US ‘taper tantrum’ serving as the source of the first, powerful reminder that emerging economies were still, very clearly, highly influenced by the fortunes of their developed peers.
Frayed nerves were soon calmed in 2014, as investors speculated that the first rate hike by the US Federal Reserve was (once again) further away than consensus had begun to indicate.
Before long though, jitters had again returned to emerging markets in 2015, with with a marked decline in commodity prices weighing on the fortunes of commodity exporters, while Chinese economic growth concerns caused a correction in broader emerging markets.
The ‘Fed fear factor’ has been virtually omnipresent in 2015, with ongoing uncertainty over the timing of the ‘lift-off’ leading several central bankers – from the Reserve Bank of India’s Raghuram Rajan to Peru’s Julio Valarde and Indonesia’s Mirza Adityaswara – to express publicly their enthusiasm for the Fed to act.
Sentiment continued to swing back and forth, however.
Following the marked decline in China’s equity market, and ensuing currency devaluations, October’s weaker-than-anticipated US employment numbers were accompanied by a rebound in emerging market risk assets.
Once again, the timing of the Fed’s first hike was called into question, before subsequent stronger US employment data caused yet another change in sentiment.
If we accept that the great emerging market ‘decoupling’ myth is just that – and on the strength of events over the course of 2015, this would seem prudent – then we believe the outlook becomes potentially a little clearer.
If investors are subsequently able to reassure themselves that the next US rate cycle will not peak too high, or too fast, then the backdrop for emerging market debt as an asset class looks decidedly more optimistic, possibly supporting a relatively ‘soft landing’ for China’s economy.
Such an outcome would, ultimately, represent a continuation of the theme of the power of the Fed’s influence over the global economy.
Put another way, since the 2013 ‘watershed’, at times when emerging market assets have performed well, strong performance has been largely a reflection of the US employment picture and the market’s perception of what this implies for US rates, rather than being driven by sound domestic fundamentals.
John Peta is head of emerging market debt at Old Mutual Global Investors
