After a phenomenal 2017, the last eight months have been painful for emerging market investors. However, despite this period of negative performance, we believe this year’s downdraft could lead to opportunity.
Over the last 12 months, most market participants have focused intently on the Federal Reserve (Fed) beginning to wind down the asset purchase programs enacted during the global financial crisis. However, after one of the worst years for emerging market (EM) assets since 2008 and a tumultuous start to 2014, EM central banks are seeking to bolster their own credibility and help restore order in markets that have been all too prone to overshooting on both the up- and the downside.
Frequently quoted by international economists as a means of assessing the value of currencies against one another, the basic notion of purchasing power parity (PPP) states that if currencies are in equilibrium (or fairly priced), then converting one currency into another should buy the equivalent amount of goods in another country.
For the second year in a row, in May emerging market currencies and debt came under selling pressure and experienced some of their worst performance of the calendar year so far. In May 2012, concerns about the solvency of the eurozone and weaker global growth proved to be a momentary catalyst for the sell-off.