Following Brexit, there is less likelihood for a US Fed rate hike, which favors the investment appeal of emerging markets [Xinhua]
Who’s afraid of a big bad Brexit?
Not emerging markets who have been through days of strong growth, including having currencies buoyed against the US dollar since Britain voted to leave the European Union last week.
In Brazil, the currency real opened 2.16 per cent stronger against the US dollar on Wednesday, reaching its highest level in 2016.
It was a similar picture for the Mexican, Chilean and Colombian pesos. Meanwhile, the Russian ruble appeared to have regained considerable ground reaching its strongest against the US dollar since October last year.
The benchmark Russian exchange MICEX continued its second day of gains, growing 1.3 per cent in similar fashion to markets in other emerging economies.
Overall, while most global markets roiled as Brexit caused $3 trillion in investments to be shaved off exchanges around the world, emerging economies fared better.
Why?
Well, for one thing the market turmoil immediately following BREXIT last week – including the dramatic drop in the Sterling Pound’s value almost overnight – is likely to convince the US Federal Reserve that it would be a bad idea to increase interest rates this summer.
The focus will also be on central banks to see if they will introduce some kind of stimulus packages to stem the fallout from Brexit.
That works well for emerging markets, too. Following the 2008 sub-prime mortgage crisis threw global financial markets into turmoil, emerging markets flourished because stimulus packages like the Federal Reserve’s $85-billion bond buy-back program essentially created extra cash which was then invested in such countries as Brazil, India, China, Nigeria, Turkey and Indonesia, to name a few.
Between 2008 and 2014, these countries saw double digit GDP growth as FDI soared.
Now, conditions are starting to appear somewhat similar.
The phrase no one wants to hear right now is ‘sell-off’ but that’s what happened last week following the Brexit referendum vote.
The $3 trillion shaved off global markets indicated a deep fear of volatility which could make emerging markets more appealing.
Sure, they’re risky, but they also offer high payout and global investors are always looking for a bargain – which is why they briefly ran to the dollar and the Japanese yen, considered safe bets.
Last year, global markets were on the lookout for Grexit and had not yet been fully impacted by China’s economic corrections.
On Tuesday, Chinese Premier Li Keqiang told delegates gathered at the World Economic Forum in Tianjin that the government would move quickly to prevent the tumultuous kind of rollercoastering that threatened the economy last year.
The message is that China, and perhaps other countries, most likely will intervene in markets to prevent mass sell-offs.
His message did the trick. The benchmark Shanghai Composite Index closed 0.65 per cent up on Wednesday, while Hong Kong’s Hang Seng Index was up 1.31 per cent.
The BRICS Post with inputs from Agencies
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