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A report by the IIF at the end of September shows that portfolio outflows from EM were at the highest level since the US election.
However, the reason for this EM-angst isn’t clear. Perhaps it’s a bit of profit-taking: a report by Ashmore found that EM equities returned 11.19% in 2016 in dollar terms and a mighty 30.45% in the first nine and a half months of 2017. Are these impressive returns leading investors to think irrationality is at play, and therefore to consider an exit?
But scanning the risk horizon doesn’t reveal any real risk to the EM story. Rather, it appears that emerging markets have already passed their tests. The taper tantrum that began in May 2013 led to massive capital flight, accelerated the 45% rally in the dollar against EM currencies (between 2010 and 2015) and came at a time when commodity prices halved and there was persistent pessimism about China.
Tipsy on such a negative cocktail, investors rushed out of EM, and by late 2015 bond yields were higher than they had been in 2006 when the US Fed policy rate was 5.25%.
In other words, EM has already been through a phantom US rates normalization – and passed with flying colours.
EM economies’ resilience in the wake of the taper tantrum proved that they are (on the whole) much better run and regulated and, therefore, more solid than in the past.
Importantly, contagion as an issue seems to be like a preventable disease – an illness consigned to history that will only return because of incredible stupidity.
Even if an EM downturn does appear, there won’t be a catastrophic outcome, certainly not on the scale that would warrant missing out on today’s still-strong upside. For EM investors, the only fear is fear itself.