Emerging markets have enjoyed their best year in almost a decade. As the first quarter of 2017 comes to a close, traders have cast their votes and the results are in: emerging markets are the winners of Q1 2017.
Global uncertainty hasn’t been enough to forge cracks in emerging markets. Rising commodity prices have underpinned the rally. However, supporting the bullish tones is the revival of the manufacturing, tipping up growth in Europe and Asian emerging markets.
Countries like Africa have had recent findings of copper, cobalt, thermal coal, metallurgical coal, iron ore, uranium, bauxite, gold and nickel deposits. These explorations have resulted in new mining operations and stimulation in the job market. The rand, South Africa’s currency, could lift as a result.
However, bubbling under the surface lies political turmoil. The South African rand plunged 8.6% against the dollar after rumours circulated that finance minister Pravin Gordhan will be abruptly dismissed. Gordhan is the nation’s third finance minister in three months.
On Thursday, the rumours were confirmed, Gordhan was fired by president Jacob Zuma, unnerving markets.
Meanwhile, the Turkish lira has recently stabilised since the aggressive sell-off at the beginning of 2017. The Central Bank of the Republic of Turkey further tightened monetary policy, which helped o support the lira.
Like the lira, the Mexican peso has been supported by a tightening of monetary policy. The currency developed a strong inverse relationship with the triumphs of Donald Trump. After president-elect Trump became president Trump the Mexican peso suffered a sharp decline.
On the other hand, the Brazilian real’s outlook looks more muddled. Political concerns are taking hold, many investors fear that corruption could hamper the Brazilian government’s efforts to balance its budget.
As the dollar advances, many investors will take investment from developed nations and funnel it into Looking to the future, developing nations that can withstand stronger foreign currencies will be better equipped to sustain growth.
With as many as four US rate hikes on the table for 2017, the dollar will likely rise this year.
The reversal of capital flows is damaging to emerging markets as they are heavily reliant on foreign inflows. Developing nations often have a fund or current account deficit, where the value of imports exceeds the value of exports, the stream of money from developed nations help to finance these nations.
However, even with an increase in US borrowing costs on the horizon, this year the dollar has shed 2% off its value. The bearish bets have supported emerging market currencies.
Among the countries most vulnerable to rising US interest rates are; Brazil, Turkey and South Africa.
The MSCI emerging markets has gained 9% this year, compared to its developed world counterpart’s 5%, just this year.
While investing in emerging markets is seen as risky, the benefits are clear including; higher expected returns, diversification and increased economic growth rate.