The Loss Of Capital From Emerging Markets Is Helping To Separate The Good From The Bad
As talk has continued for months now on when we could expect the Fed to begin tapering their $85 billion/month bond-buying program emerging markets such as Brazil, India, Mexico, and South Korea have felt the squeeze, as investors have fled the emerging markets in anticipation of changes in the financial system. This tapering could begin as early as next week and emerging markets could further feel the financial squeeze of the situation.
Emerging Markets Had Been The Place To Invest For Higher Yields
Up until recently, emerging markets had to do very little to attract investor money. The overwhelming interest in the profit potential caused an influx of cash flowing into emerging markets. As the gravy train begins to dry up for many of these markets, they will have to work harder and prove their stability via structural reform for investors to continue to invest their money there. The MSCI emerging market index fell 12% from May-September. This is the equivalent of $3.3 billion being yanked out of emerging bond funds since late May.
The Switch Out Of Emerging Markets Will Separate The Boys From The Men
Among the emerging markets, there are some considered “safer” and more structurally sound than others. Those will be the countries that will weather the changes in the capital flow better than the others. As of now, the countries that are struggling the most with the decrease in investor interest are India, Turkey and Brazil. They are trying to combat rising inflation rates and stagnant growth with less help from outside investors. Other countries such as Mexico and South Korea are expected to suffer less in light of the current situation for emerging markets. The Peso did weaken by 2% against the dollar, but compared to Brazil and India whose currency dropped 11% and 18% respectively, Mexico is faring rather well.
Investors Should Exercise Caution With Emerging Markets
As the tides are changing, investors should definitely exercise caution when considering a position in emerging markets. The current investment changes should encourage investors to use discernment and caution in which economies are left afloat with the decrease in capital. Emerging markets still offer better profit potential than advanced economies. The IMF is still anticipating a growth rate of 5% this year, which is 4x the amount seen in a more advanced economy. Investors simply need to weigh the profit potential against the risk involved before jumping in with both feet. Determining which countries implement the better structural reform creating a more stable environment, will help investors discern, which are considered safer investments.
For more information on the emerging markets as investments, and on whether or not the benefits outweigh the current risks, speak to a Redhawk Wealth Advisor near you today.