financialsense.com / GLOBAL RISK INSIGHTS / 09/08/2016
In this debate series, GRI asked: With increasing political risks and instability occurring in spots such as Turkey and Brazil, is there still an appetite for investors to invest heavily in these emerging markets? Analyst Eric Simmons says to hold off for now. Read the opposing case here.
The past few years have shown an influx of investors into the emerging markets asset class, but this appetite will soon taper off and heavy investment in this area will not be sustained. As political risks continue to increase in emerging markets countries, we will see a decrease in both the number of supportive monetary policies undertaken by the G20 economies as well as the overall level of geopolitical uncertainty that currently exists in the developed world. The resulting impact of these forces will be the elimination of the financial environment that has been extremely conducive to emerging market investing.
Although emerging market countries such as Turkey, Brazil, and Thailand are dealing with their own increases in political risk, Wall Street has tended toward investment in their emerging market economies as it waits for the developed world to settle down, at which point it will rebalance its portfolios back in the developed direction. As we move into the end of 2016, emerging markets will continue to have to navigate through increasing geopolitical headwinds while the developed world’s risks moderate, effectively tipping the risk/reward balance for investors back toward the developed markets.
The Current Positive Trend for EMs
In recent years, dovish monetary policies (e.g., keeping interest rates at all-time lows, engaging in quantitative easing) have taken root in a number of developed economies, supporting an increased level of risk tolerance by investors and effectively overcoming what has been a historical barrier to entry for the emerging markets.