Emerging markets are better positioned for the end of cheap money

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Most major emerging economies are engaging in various forms of multi-year reform programs in hopes of making their growth less volatile and their financial systems more stable, and I expect to see some of the signposts mentioned above over the next year or two.

In the meantime, the phase out of the Fed’s cheap money will continue to lead to capital outflow from EM countries and weigh on EM assets. That said, some EM countries are better positioned than others to weather reduced monetary stimulus from the United States. In particular, countries with sound fundamentals characterized by current account surpluses, significant foreign exchange reserves and healthy corporate leverage are likely to better withstand significant capital outflows.

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Market Realist – The graph above shows the current account balances for major emerging markets (EEM)(VWO). China (FXI) stands out with a current account surplus of $73.4 billion. Most emerging markets seem to be running a current account surplus. The only exceptions are Brazil (EWZ), India (EPI), and Indonesia.

Countries like China and South Korea (EWY) have high foreign reserves coupled with current account surplus. Capital outflows won’t affect these countries, as these countries have tools to fight their effects, like currency depreciation.

Please read Market Realist’s Don’t forget about emerging market equities, a key opportunity to understand emerging markets better.

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