Can Emerging Markets Stand the Heat?

15 October 2014

Standard Life Investments, the global investment manager, believes that the likelihood of a systemic emerging markets crisis is modest, but there are pockets of risk that investors should be mindful of.

The latest edition of Global Horizons explains how a heat-map of external, domestic and institutional indicators and imbalances has been constructed by Jeremy Lawson, Chief Economist, and Nicolas Jaquier, Emerging Markets Economist. The heat-map can be used as a screening tool to help fund managers and investors improve their understanding of the large quantity of economic and financial data available on emerging markets.

Jeremy Lawson

Jeremy Lawson, Chief Economist, Standard Life Investments said:

"One of the burning questions within the investor community is whether a systemic emerging market crisis is on the horizon. How will the emerging market world cope with the normalisation of US monetary policy? What are the implications of a hard landing in China?

"There is no perfect system for predicting crises in emerging markets and investor sentiment itself can be very hard to predict. Nevertheless, there are indicators that increase the vulnerability of an individual country to a crisis. The heat-map which we have developed assesses the susceptibility of emerging market economies to future shocks.

"Although emerging market economies face a more challenging economic and financial outlook over the next few years, investors should differentiate between countries when allocating scarce capital. There are pockets of high vulnerability in Venezuela and Ukraine, and rising risks in some mainstream markets such as Brazil and Turkey. 

"However, the majority of emerging countries have upgraded their policy frameworks since the last major crisis in 1997-98, and imbalances are now less severe, as is the likelihood of a systemic crisis. Governments should still do more to shock proof their economies and accelerate reforms to raise the long term growth rates."