Market update: What’s happening in emerging markets?

Market update: What’s happening in emerging markets?

Market update: What’s happening in emerging markets? 150 150 Piers Bolger

This month it’s all about emerging markets. In a financial sense, an emerging market is one where the economy isn’t as developed as markets like Australia, the US, UK and Europe. These countries are increasing their living standards, productivity and the level of their industrial production. Emerging markets include countries such as China, Brazil, Argentina, India, the Philippines and Vietnam (just to name a few).

Emerging markets represent nearly two-thirds of global GDP and almost 60% of their population are under the age of 25. This is important because as the population grows so will their consumer base, and consumers (via personal consumption) form the core driver of every global economy. For example, in the US (as is in Aust) around 60% of GDP is driven by the consumption of goods and services.   

From an investment point of view, it makes sense to have some exposure to emerging markets. But recently the US/China trade dispute has ruffled some feathers and caused a significant impact in emerging market performance over the last three to six months. In 2017, emerging markets delivered a return of nearly 20%, but over the last 12 months this has dropped to 9%. The trade dispute has also impacted investor confidence. As a result, we’ve seen capital move out of emerging markets, resulting in both a sell down of their equity markets as well as their currencies. The knock on impact has meant that debt refinancing in emerging markets has become more expensive, which is resulting in further capital outflows – all of which creates a downward spiral.

But when we look at the level of economic activity that drives emerging markets, the fundamentals remain sound. Their valuations are still attractive and the risks associated with emerging markets are very different to what they were during the currency crisis of (say) 1998. Both locally and globally, the balance sheets, fiscal positions, political and regulatory environments of governments and corporates in emerging markets are far stronger than they were 20 years ago.

So in some respects we feel the extent of the sell off is overblown. That said, it’s still important to be mindful of the risks, especially when we don’t know how long this trade dispute will go on for and whether it will escalate from here. So, while we’ve moderated our exposure to emerging markets slightly we haven’t thrown the baby out with the bathwater. We believe the fundamentals of emerging markets remain strong and there is long-term upside. That’s why they should still be a part of your global equity strategy.

As always, it’s important to speak to your advisor about any concerns that you may have about emerging markets and to understand how they fit in with your broader investment strategy.

Piers Bolger is Chief Investment Officer at Viridian Advisory

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