EM idiosyncratic, not contagious EM idiosyncratic, not contagious http://www.federatedinvestors.com/static/images/fed-logo-amp.png December 6 2018

EM idiosyncratic, not contagious

Macro pressures are exacerbating problem pockets, not spreading them.
Published September 13 2018
My Content

When analyzing turbulence in emerging markets (), it is tempting to connect various dots of instability into a larger picture of a brewing crisis. No matter how isolated one country’s financial state is from another, the specter of contagion always looms. But, taking the health metaphor further, different causes can show the same symptoms. EM in recent weeks has been a case of a few unhealthy economies collectively appearing like—but not actually being—the early onset of a spreading crisis. In fact, it is a case of a few idiosyncratic risks exacerbated by the top-down, macro factors of a strong dollar, a potential trade war and rate tightening.

The problems of the two most prominent countries, Argentina and Turkey, would exist on their own. Corruption is instigating the former, poor policy and a shaky government the latter. Even lumped together, they are small global players. But add the Trump administration’s tough trade talk, and the punishing climb of the dollar, and these economies not only look worse than they are, but seem to be part of international problems that would, of course, be infecting other EM markets.

But that is not the case. For instance, Russia’s issues are largely related to sanctions and Brazil to financial mismanagement—in other words localized problems. Formerly problematic countries like Indonesia, Mexico and Peru are far better situated to defend themselves, with low foreign debt, healthy inflation and good economic growth.

In short, EM today is a case of micro circumstances being inaccurately viewed as a macro disaster in waiting. There are some interconnected stories, and when investors sell funds they usually divest from the entire asset class. But the markets has been overshooting.

This all adds up to opportunity. If you wait for the clouds to clear in EM, you will be waiting forever. Today’s developing economies are not a buy short and sell fast strategy. More than ever, the asset class is not monolithic. Opportunities are found in individual countries. And should some of the macro issues reverse—even a softening in trade threats, a slightly more dovish Federal Reserve or a dollar retracement could turn things around quickly. Expect more volatility, but in pockets, and look for opportunities. Leave connecting the dots to children. 

Tags International/Global Active Management Income
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Prices of emerging-market and frontier-market securities can be significantly more volatile than the prices of securities in developed countries, and currency risk and political risks are accentuated in emerging markets.

Federated Investment Management Company is the advisor to the fund.

Federated Securities Corp.