The View | The easy money has been made, but expect emerging markets to continue to do well in 2018
The rally in developing economies still has legs, just don’t expect 2018 to deliver the kind of returns we saw this year
As 2017 draws to a close, emerging market assets are showing signs of strain.
Inflows into emerging market bond and equity funds have been much more volatile over the past few months. Last week, equity funds suffered outflows for the third time in the last six weeks while investors in bond exchange traded funds (ETFs) – popular low-cost funds which track an index or specific asset – have been withdrawing money in the last few months, according to data from JP Morgan.
The US dollar, moreover, whose sharp fall this year has been one of the key drivers of the dramatic rally in emerging markets, is rising again, with the dollar index (a gauge of the performance of the greenback against a basket of its peers) up 2.7 per cent since early September. Last week, the greenback had its best week this year.
The dollar’s renewed appreciation may have further to run.
On Wednesday, the Federal Reserve is widely expected to raise interest rates for the third time this year and may be forced to accelerate the pace of monetary tightening if the tax package currently making its way through Congress ends up stoking inflationary pressures. This would drive the dollar up further, putting emerging market currencies and local bonds under strain.
Then there is the other major threat to sentiment towards developing economies: China. Beijing’s growing determination to curb debt-financed growth has already triggered a sharp sell-off in China’s government bond market and is fuelling concerns that the economy will slow, thus crimping global demand for commodities. The Bloomberg Commodities Index, which shot up 11 per cent between late June and early November due to the improved outlook for commodities, has fallen more than 4 per cent over the past month partly because of renewed concerns about China.
