Daily Management Review

Not All Emerging Markets Are Worth The Risk, Realize Investors


Not All Emerging Markets Are Worth The Risk, Realize Investors
Despite the obvious signals that the United States Federal Reserve has embarked on a path of hiking rates, there has been little sign of relief for some emerging markets.
While the peso of Argentina is at its historic low, the Lira of Turkey is down and is lying close to its lowest for the year once again and the rand of South Africa is close to its lows it dropped to in December.
Many economists question the positioning of those currencies if the US Fed was in a monetary tightening mode. Whenever there is a hike in the interest rates in the US, it has a negative impact on the health of emerging economies because investors pull out their investments in emerging markets and invest back in the U S instead because of higher returns.
The pressure from emerging markets might have been taken off by a dovish Fed, but many investors have started to believe to a greater extent that the mantra not all of these economies are of similar nature. Economists point out that those countries that have seen their currencies drop significantly this year not only have high levels external liabilities in dollars but are also the ones that have the been clocking the slowest rate of growth among the emerging economies.
Following contraction of 6.2 per cent in the last quarter of 2019, Argentina is in the depths of a recession. The government there under President Mauricio Macri is struggling to control the high inflation rates and pressure from the International Monetary Fund to bring in high levels of cuts in government spending. The country is also facing  a national election later this year.
There is also stagnation in the Turkish economy. Toward the end of 2018, the economy contracted by 3 per cent while the rate of inflation in the country is just short of 20 per cent with pass-through from the currency following the depreciation of the lira by 20 per cent in 2018.
The local elections this past weekend is being seen as a national referendum on President Recep Tayyip Erdogan's policies, however traders believe that either way "we are likely to see more volatility as locals continue to buy dollars and are worried about the growth outlook."
Beyond politics, "markets would like to see a shift in the growth model: away from a credit-dependent model towards a more sustainable one," wrote Robin Brooks, the chief economist at the Institute of International Finance, in a note last week. Brooks added that the events sin Turkey cannot be assumed to be isolated because investors tend to become cautious about those countries that have high levels of debts and credits and depend on such financing. 
Here were a number of events and incident that rocked the global markets in 2018 including the tightening financial conditions, a global trade shock and financial market instability and a slowing China.
However one can now assumed that worst conditions for the global economy has now passed away because of rising hopes of a trade deal between China and the US, the dovish outlook of the US Fed and positive data out of China during the weekend.