A recent IMF study, included in its World Economic Outlook report, notes that many emerging economies have shown unexpected resilience to global shocks - such as the post-COVID phenomena or the war in Ukraine - thanks to advances in their economic policy frameworks and domestic markets.

What has changed?

• Central banks in many emerging countries have strengthened their independence, improved inflation management and become more flexible on the exchange rate.
• Governments have strengthened their fiscal frameworks, reducing their vulnerability to adverse external conditions.
• Local currency debt markets have expanded in several economies, reducing the risk of dollar-denominated debt and exchange rate exposure.
• The IMF estimates that this policy improvement contributed, on average, an additional +0.5 percentage points to growth and -0.6 points to inflation during the last few shocks, over and above the "good fortune" of favorable external conditions.

Why does it matter for investors?

• Greater resilience means that periods of "global risk," such as sharp drops in risk appetite or capital flight, could affect well-structured emerging markets less. That makes them more attractive as part of a diversified portfolio.
• However, not all emerging markets are at the same level, not all emerging markets are at the same level: those with weak policy frameworks or shallow capital markets remain vulnerable.Those with weak policy frameworks or shallow capital markets remain vulnerable. Investing without discriminating between economies may involve greater risk than it appears at first glance.
• Given this environment, investors may pay more attention to those emerging economies that:
  • They have high local currency debt and a good domestic savings ratio.
  • They have sufficient banks and capital markets to absorb shocks.
  • They have credible and clear monetary/fiscal policies.

Nuances and risks to keep in mind

• Although policies have improved, the IMF warns that external conditions may worsen rapidly. external conditions can worsen rapidly (e.g., global rate tightening (e.g., a global rate tightening, inflationary spike or trade disruption), and in such cases "guards" are not enough.
• The fact that an economy has local currency debt does not eliminate other structural risks: high levels of indebtedness, dependence on external financing, or still incipient capital markets remain a vulnerability.
• For more "frontier" (less developed) economies, the road to greater market depth is still long: risk spreads remain large there.

In conclusion, for the high net worth investor looking to diversify beyond traditional markets, this IMF report offers an encouraging sign: many emerging markets are better prepared to diversify beyond traditional markets. better prepared better prepared than before to weather storms in the global environment. But this is not a risk-free scenario: the key will be to choose carefully which emerging economies, within that broad group, have sufficiently robust policy instruments and local markets to really offer that advantage.

Fynsa 

Source: International Monetary Fund (IMF)