Opposite forces are shaping investor sentiment towards EM assets.
Investor sentiment towards emerging market (EM) assets is being shaped by the conflicting forces of a strong dollar and the launch of a sovereign quantitative easing (QE) programme by the ECB. While the latter is likely to encourage investment into higher-yielding assets, such as EM debt, the former will keep the currencies of developing economies under strain, particularly those most sensitive to a rise in US interest rates due to heavier reliance on capital inflows to finance large current account deficits, such as Turkey and South Africa.
- EM bonds will benefit from ECB-related inflows, while the strength of the dollar will keep local currencies under strain.
- Higher-yielding EMs will benefit the most from the ECB's bond-buying scheme since they provide the greatest scope for 'carry trades'.
- The collapse in oil prices is forcing EM central banks to turn increasingly dovish, putting further strain on local currencies.