The importance of differences

Differences in financial vulnerabilities can help investors choose which emerging market to invest in for 2016, says Standard Life Investments, the global investment manager.

It says that emerging markets have experienced several years of relative underperformance and that in 2016, they will face considerable external headwinds such as China’s slowdown and rebalancing, weak commodity prices, higher short-term US interest rates, and possibly further US dollar appreciation. Countries will react in different ways to these pressures depending on the extent of any imbalances and their own economic and institutional characteristics.

Chief economist Jeremy Lawson and emerging market economist Nicolas Jaquier highlight important differences in their risk ratings of individual countries in the latest update of the Standard Life Investments emerging markets heat map.

Jeremy Lawson said: “In May our heat map proved to be a useful indicator of subsequent asset price movements. Countries like Hungary, Korea and Russia showed relatively low risk and generally fared better than those at the higher end of the spectrum such as Brazil, Turkey and Peru.

“Venezuela and Egypt, with pegged or inflexible exchange rate regimes, remain the countries where our heat map shows risks are highest. Brazil and Malaysia have lowered their risk score after seeing their basic balances improve during the year, though risk is still high. Turkey’s external vulnerabilities are unchanged broadly, despite the benefits of the drop in oil prices.

Whilst Colombia’s external variables improved marginally, this was offset by rising domestic imbalances, they say. The outlook for fiscal balances has deteriorated notably in Latin America and Russia, and a marginal worsening of domestic balances led to a slight increase in risk for India, Indonesia, Mexico and The Philippines, they conclude.