Macroscope | Contagion fear: emerging markets’ currency crises spook investors far and wide. How will Asia fare?
Patrik Schowitz says that as bad as the news has been for emerging markets, particularly Turkey, Argentina and South Africa, there’s little risk of a total meltdown among Asia’s emerging economies, where fundamentals look sound
In assessing the impact of geopolitical risks on portfolios, we can turn to some time-tested lessons from history. First, uncertainty can be more damaging than the event itself; second, it is often in the currency or government debt markets – sometimes both – where geopolitical risks play out most strongly; and finally, equity markets can at times prove surprisingly resilient to political turbulence.
But there are differences between emerging and developed markets. While it is tempting to assume that a geopolitical issue will send investors running from all a country’s asset markets, this is mainly the case in emerging markets, where currency and asset markets tend to be positively correlated (moving in the same direction). In developed markets, however, currency and equity markets are normally negatively correlated, exerting a stabilising influence on asset prices during times of worry.
