3rd June 2015
Investors have been warned to review their exposure to different emerging markets as countries such as Brazil and Malaysia have seen their risk levels increase over the past six months.
Standard Life Investments, the global investment manager, has found that the risk profiles of emerging economies have changed considerably over this time.
Countries such as Mexico and India generally look safer now, the investment manager says, while conditions in already risky countries like Brazil and Malaysia have deteriorated further.
The largest reduction in vulnerability was in Ukraine and Russia, thanks partly to better management of monetary policy, although this could change if there is a re-escalation of conflict between the two countries.
Standard Life Investments has produced a heat map to assess the vulnerability of emerging market economies to future shocks.
The map and research will be updated every six months to help investors and fund managers improve their understanding of the large amounts of economic and financial data and potential threats currently facing emerging markets.
Jeremy Lawson, chief economist, and Nicolas Jaquier, emerging markets economist created the heat map in October 2014 and produced an update in May 2015 which incorporates data following the two main shocks in recent months – the collapse in oil prices and sharp rise of the dollar.
The heat map, as well as more detailed commentary on individual countries, can be viewed in the full report online.
Lawson says: “Risk improvement was particularly prevalent in Eastern European countries such as Poland, Hungary and the Czech Republic, thanks to improving fiscal policy and falling inflation. Mexico and the Philippines which scored amongst the most resilient back in October also continued to strengthen – as a large oil importer the Philippines benefitted from falling oil prices. India and Indonesia were also out-performers, cutting fuel subsidies and spending more on infrastructure.
“At the other end of the spectrum, vulnerabilities are heightened in economies with large macroeconomic imbalances or reliance on exporting commodities, such as Brazil, Chile, Malaysia and Turkey.
“The dispersion of risk highlights that emerging markets should not be analysed as a homogenous group, it’s essential that investors adopt an active unconstrained approach. Whilst emerging market risk remains well below pre-Asian crisis levels, the next challenge ahead will be the beginning of the Federal Reserve’s rate hiking expected in the second half of 2015 – it’s the pace of this that will prove critical.”