Emerging markets have long been a space where active, bottom-up stock picking traders thrive and find gold mines for their investors, but this year, a lot of active traders are raising concerns about domestic risks facing each country.
Traders of Nigerian assets are expected to be bracing themselves after an 11th hour postponement of its presidential elections. For South Africa’s, rand was back on its perch as the world’s most volatile currency on Saturday as investors price in the risk of a credit-rating downgrade while awaiting details of the government’s rescue plan for 96-year-old state-owned electricity company Eskom Holdings SOC Ltd.
Also, Bank Indonesia hinted that it will maintain its tight money policy this year amid the normalization of monetary policies by central banks in other countries.
In Mexico, investors are fretting over some of President Andres Manuel Lopez Obrador’s fiscal measures, including pulling the plug on a partially built $13 billion new airport in Mexico City. Lopez Obrador, better known by his initials AMLO, also said last week he would announce measures supportive of Pemex, a giant state-run oil company.
AMLO did not provide specifics in his comments from last Tuesday, leaving investors worried about how sweeping his proposals could actually be. AMLO’s comments came after ratings agency Fitch cut Pemex’s rating to BBB-, the lowest investment-grade rating, from BBB+.
Nnamdi Olisaeloka, a fixed-income analyst at Zedcrest Capital Limited, explained that there are some idiosyncratic risks that will face emerging market countries which also include political risk.
“From the stand point of foreign portfolio investors they will actually be evaluating those risks before deciding to invest. The whole emerging market euphoria has slow down because of the identify risk factors within this particular countries,” Olisaeloka told BusinessDay.
Adetola Adelu, Financial Analyst at Fides Capital Partners said the investors are very much concerned about domestic risk (which affects survival of the business) as such, they require additional premium.
“Domestic traders too are concerned about their business performance which is grossly affected by domestic risks which includes regulation, political instability, insecurity and inflation,” Adelu told BusinessDay.
According to Bloomberg, the MSCI Inc.’s index of currencies capped a second week of declines Friday, the longest losing stretch since September and a whisper away from closing below its 100-week average for the first time since August. When it fell past that level in 2014, the gauge went a losing run that extended into 2016. The index rebounded on Monday.
Amid growing worries about rising corporate debt, falling inflation and weaker global economic growth, a Bank of America Merrill Lynch February survey showed that fund managers named emerging markets as the most crowded trade for the first time.
Also, another major concern for emerging market is the current Trade talks between the US and China which appear to be making good progress. Both sides issued positive remarks about the progress of the negotiations, including President Trump’s admission that he may agree to an extension to the March the 1st deadline, maintaining the current level of tariffs on Chinese imported goods beyond that date.
The news appears to have calmed the nerves of investors and as fears over an escalation in the trade conflict recede, so does the value of the Dollar.
The 10 big emerging markets economies are (alphabetically ordered): Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea and Turkey. Egypt, Iran, Nigeria, Pakistan, Russia, Saudi Arabia, Taiwan, and Thailand are other major emerging markets.
