The weakening U.S. dollar has long since been a crux in the side of the emerging markets. Those markets that shift from closed to open market economy.
Areas of the top 10 including:
- South Africa
Amongst a dozen others.
Yet, the 2.5% loss in the U.S. dollar (when compared to others) has presented a unique opportunity and benefit to emerging markets. The gap from 2011 to 2016 has not been kind to these regions but change is coming.
Why Emerging Markets are Back
Two interesting developments lead the new shift in attention for EM’s:
- A 17% gain (in 2017) for the iShares MSCI Emerging Markets ETF
- A 7% gain (also in 2017) for the SPDR S&P 500 ETF
These reports have influenced Zach Pandl, the co-head of global foreign exchange and emerging markets strategy, to reevaluate its foreign exchange forecast.
Alongside comes an extensive report from Scotiabank detailing global currency forecasts and trends.
Other influences include:
- An increase in demand for commodity due to their leveling
- An ongoing reduction of current account deficits
- An active set of reforms and acceleration of Chinese economies
Politics play an important role. The impeachment of Park Geun-hye of South Korea and shift in ruling parties of India are two such examples.
Lest we forget the impact of trade and business.
An influx of global outreach has been seen on a peer-to-peer level with the popularity of social lending and small business loans.
Likewise, the IT sector has seen success in emerging markets through the introduction of Internet companies, online transactions, gaming, and access to hardware.
The anticipation of new consumers in these markets are expected to contribute more than 70% of the global GDP. Areas, previously restricted in Internet access, have tripled. Mobile consumption due to cheap devices and services like Alipay play an important role.
The biggest winner is likely to be oil companies. The growing demand for new products and higher oil prices creates demand for alternatives such as solar, wind, and shale.
Michael Hartnett, Bank of America Merril Lynch’s chief investment strategist had this to say in mid-2016:
“There’s one thing that emerging markets have that everyone wants right now and it’s not raw materials or cheap labor — it’s yield. When you have negative interest rates in Europe and Japan, and zero rates everywhere else, the politics and economics of these countries becomes irrelevant.”
There are investment woes despite the positive outlook.
Investment Risks in Emerging Markets
As with any investment — there come risks.
Politics while playing a positive role in some emerging markets are not always the case in others. Political development may lag behind the economic growth and globalization which could pose a backlash from its citizens.
A general lack of transparency from companies and markets within these countries could also play a role. Fewer requirements, reporting, and human rights may create a difficult judge in investment for foreign investors.
U.S. protectionism and tension between allies and trade in China could introduce instability. A shake found in a recent executive order to withdraw the United States from NAFTA.
Growth is not guaranteed though optimism and the markets show a shift. Emerging markets create a high-risk, high-reward scenario that will be a worthy consideration for all players involved.