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“Global investors have typically been happy to own Emerging Market risk over recent years, although the escalation in trade wars and the dollar rally from early Spring this year has asked some serious questions,” ING analysts say.

Key quotes

“That said we are far from seeing a wholesale exodus from emerging markets. Looking at one sub-set of flows – flows in EM local currency debt funds –  the retreat has been relatively mild compared to the strong inflows seen through 2016-2017.”

“An insight into flows into this segment can be gleaned from two popular Exchange Traded Funds (ETFs) that track the JP Morgan EM Local Currency bond index. These ETFs have seen outflows since April this year, but the move looks relatively modest so far. The membership break-down of these ETFs shows Turkey as having one of the smaller EM weightings at 4.0% and 2.4% respectively. This compares to the ‘big beasts’ of the EM debt indices such as Brazil, Mexico, Indonesia, Poland and South Africa, which all tend to have weightings closer to 9-10% in these benchmark indices.”

“Although the Turkey-related global market sell-off has registered a spike in our Global Risk Aversion index similar to episodes such as the 2013 Fed ‘taper tantrum’, we note that such sell-off episodes in 2018 have not been sustained (the overall Global Risk Aversion index is still at historically low levels).”

“Those currencies most sensitive are the usual high-beta suspects like the South African rand (ZAR) and Mexican peso (MXN) – and while these currencies suffer on days when global risk aversion spikes, they also typically rebound quite sharply on any short-term reprieve in global risk sentiment. This is worth bearing in mind given the ever-changing geopolitical backdrop.”