Analysis: Emerging Markets and Contagion

Analysis on Recent Emerging Markets Volatility and Fears of Contagion

If you’ve been following the financial news, you are well aware that emerging markets are struggling right now. This may come as a shock, being that emerging market assets (both equities and debt) were among the best performers of 2017. However, as U.S. interest rates have continued to rise and as the dollar has continued to strengthen, Emerging market economies are having trouble keeping up. Several EM currencies have weakened against the dollar year-to-date, including the Turkish lira and Argentine peso, both of which have plunged more than 20%. In addition, bond yields are climbing and equity prices are lower in these markets.

Despite the usual hyperbolic language coming out of the financial media, U.S. Fed Chair Jerome Powell seems intent on staying the course, recently commenting in an interview, “There is good reason to think that the normalization of monetary policy in advanced economies should continue to prove manageable for EMEs [emerging market economies].” What’s more, there are many global systemic circuit breakers in place that can kick in and help avoid contagion. One example being the International Monetary Fund, which has already begun negotiations on an Argentinian bailout.

What does this all mean for investors? For starters, the Atomi investment committee has been monitoring these developments very closely, and we will continue to do so. If we have reason to believe that the contagion will spread, we will position the portfolios accordingly. On the bright side, we’ve always been a bit skeptical of the recent run-up in EM asset prices. As a result, our allocations to EM equity and debt are quite modest. For now, we believe the best course of action is to maintain a watchful eye and not act too hastily. Rest assured, we are on high alert and will keep you apprised as the situation unfolds.

As always, please feel free to reach out with any questions or comments. We thank you for your continued support.