The Point

Why advanced economies such as South Korea are classed as emerging markets

SOUTH Korea is one of the few countries in the world to develop its own supersonic jet fighter.

It’s a stable and mature democracy — and home to some world-leading technology companies.

So some investors might be surprised to find it’s classed as an emerging market, along with Taiwan and  wealthy Gulf countries such as Saudi Arabia and the United Arab Emirates.

What is an emerging market? Who decides the definition of emerging equity markets?

It’s an enduring controversy. Some countries at the more advanced end of the emerging markets (EM) spectrum could arguably be classified as developed markets.

It’s useful for investors to understand how countries are classified as emerging markets as opposed to frontier (or pre-emerging markets) and developed markets.

Crispin Murray: What’s driving Aussie equities this week

A LOW point in the VIX volatility index last week proved to be the signal for a correction in the recent rally.

There was no specific macro news to prompt this. The weight of buying faded and the market shifted to a cautious position ahead of this week’s Fed meeting.

US ten-year government bond yields rose 9bps and the S&P 500 fell 3.4%. Brent crude oil fell 11.1% and is now down for the year to date, as the market worries about a downturn in demand.

China’s re-opening appears to be happening faster than expected.

The iron ore price rose 9.6% as a result, and is helping underpin the Australian equity market. 

The RBA hiked rates 25bps, as expected, and struck a more cautious tone on inflation.

We also saw the federal government launch a new energy policy which at first glance looks under-prepared. The policy introduces price controls that would likely make the power problem worse in the future.

There are six big macro issues going into next year:

1. The persistence of inflation — and how tight financial conditions will need to be in response

2. The scale of economic slowdown in the US and developed markets. (Real-time signals are benign, but the yield curve is a very negative signal)

3. The earnings leverage to that downturn — and whether nominal growth buffers earnings

4. Whether markets have already priced in economic downturn. The bear view is that markets bottom during recession, not before. Bulls point to a falling oil price, a weaker US dollar and lower bond yields as evidence of lessening headwinds for equities  

5. What China’s economy does as it exits zero covid

6. Whether the RBA can engineer a soft landing in Australia

Emerging Markets: Why some investors may benefit more than others as the tide turns

HIGHER US rates and a US dollar have recently curbed Emerging Markets returns, since they tend to depreciate other currencies, weaken US demand and draw capital out of EM economies.

As inflation comes under control, it’s expected that rate rises will decelerate and the US dollar will eventually weaken.

That’s good news for EM investors.

But there is another change that may benefit some emerging markets investors more than others: country-level factors are again becoming a powerful indicator of potential returns.

Investment managers that focus on top-down, country-level analysis should be able to take greater advantage of the changing conditions.

Crispin Murray: What’s driving Aussie equities this week

Crispin Murray: What’s driving Aussie equities this week

Signs of improvement for two big factors that drive Emerging Markets

A turning point for emerging markets equities is approaching as the drivers of recent weakness rapidly dissipate, believes Pendal’s James Syme.

The end of the US rate cycle is starting to come into view and a newly engaged China is beginning the process of restoring growth, says James, who co-manages Pendal Global Emerging markets Opportunities fund.

That leaves it increasingly likely that stronger returns from EM stocks are imminent, he says.

“The two big drivers of the difficult environment in emerging markets in the last 21 months all seem to be improving,” says James.

“Right now, you don’t want to be too underweight EM and you don’t want to be too underweight China.”