Emerging market assets are heading towards a tragedy in August.. What happened?

August turned out to be a chaotic month for emerging markets. Bonds and stocks in developing economies are heading for their worst monthly losses since last September after Nigeria’s central bank revealed it had lower-than-expected reserves, an outsider won the primaries in Argentina and the assassination of a presidential candidate in Ecuador.

The turmoil, coupled with a jump in US Treasury yields and dismal economic data in China – with the government stepping up efforts to stabilize markets last week – is forcing investors to reconsider the issue of riskier assets. This time, they must admit that high returns often come with high odds.

For his part, CEO of brokerage Insight Securities, Carlos Legaspi, said: “Risks have always been more political than economic.” “It’s always a moving target.”

In just a few weeks, the issue of investing in emerging market assets has taken a shocking turn for investors. Dollar-denominated government bonds have reduced their rise in 2023 to about 2.5% from a peak of 5.8%, according to data compiled by “Bloomberg” and seen by “Al Arabiya.net”. Meanwhile, the MSCI Currency Index erased much of the gains made for the year.

Stocks are also poised for the worst August performance since 2015 as global capital markets reset.

The declines are a reminder of the fragility of emerging markets’ gains, which can collapse in an instant as volatility raises the asset’s risk profile, which could lead to further selling. The Cboe Emerging Markets Volatility ETF continued to rise in August for the second month in a row.

For Lord Abbett & Co.’s portfolio manager, Mila Skolenko, one way to mitigate risk is to focus on investing in countries, particularly in Latin America and the Middle East, that are embracing favorable market change.

“The investment category in emerging markets today is not the same as it was 20 years ago,” she said. “Many systemically important emerging market countries have successfully implemented market-friendly reforms, and policymakers have the resolve to stick with these reforms through difficult times.”

local risks

However, rarely has the outlook been as murky anywhere as in Argentina and Ecuador in recent weeks. Both countries are serial defaulters in the midst of presidential elections, leaving investors guessing.

In Argentina, foreign bonds have slumped since Javier Milli unexpectedly won a closely watched presidential primary on August 13, with pledges to abolish the central bank and dollarize the economy.

And the clear disapproval of a market-friendly government in the country is enough for Insight Securities to recommend moving capital out of Argentina.

Instead, Legaspi would prefer to invest in Turkey, where recently re-elected President Recep Tayyip Erdogan has handed the reins of the economy to a proponent of traditional policies, likely signaling a shift from measures that have been blamed for accelerating inflation and exodus. foreign money.

He said, “Both cases are baskets, but one of them deteriorates further and the other seems to be returning to its senses.”

Meanwhile, Ecuador also faces an uncertain future. The nation votes Sunday in a snap general election, less than two weeks after a candidate was assassinated.

The government’s dollar debt has soared uncomfortably after the tragedy, evidence that some on Wall Street expect the nation’s next leader to tackle rising crime and stabilize the economy.

In Latin America, the focus is shifting from economics to security, said Mauro Favini, senior portfolio manager at Vanguard. “We’re seeing politicians starting to shift from populism to more security concerns.”

Investors in other regions are also working to make sense of the recent revelations. In Nigeria, the naira lost an essential source of support as the long-awaited Central Bank financial statements revealed that effective foreign exchange reserves were much lower than previously disclosed.

Russia also surprised analysts by reintroducing capital controls and sharply raising interest rates.

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