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Where next for emerging markets?

Investors need to tread with caution as uncertainty surrounds the Federal Reserve’s next move.

It was always just a matter of time before the emerging markets experienced some kind of wobble. Last month there was a reduction in risk across most asset classes. Currencies such as the Turkish lira and the South African rand suffered big falls, Latin American bonds sank to one of their lowest levels all year, and mayhem swept emerging equity markets from Brazil to Saudi Arabia to India. The questions now are: is this is a temporary blip or something more substantial, and, if it’s the latter, what picture will eventually emerge?

The immediate reaction is that this will prove to be no more severe than previous recent corrections. For the past two years the emerging markets have suffered a springtime tumble. In 2004, fears of a hard landing in China sent commodity prices lower, leading to a sell-off in emerging market debt. Last year, concerns about US interest rates and inflation had a similar effect. On both occasions the markets more than recovered, with the JPMorgan Embi Plus index heading lower and lower, eventually breaking the 200 basis point barrier in February. Some analysts reckon the fallout this time will prove no different. The Embi Plus is still hovering around the 200bp mark even after the correction while some stock markets, for example, India’s, are beginning to recover their losses.

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