Geopolitical headwinds have blown against emerging market assets, particularly over the Ukraine. One specialist thinks the situation for investors could get even worse as developed
countries seek to make “pawns” out of emerging markets in a game of self-interest.
Aggressive Western foreign policy is threatening the progress of emerging markets, says Jan Dehn, head of research at Ashmore Investment Management, who says the overhaul of the global regulatory system has helped the West raise huge debt levels on favourable terms compared to developing countries.
“The new regulatory system dramatically increased the risk weightings for bonds issued by countries with a lot of poor people, while keeping them at zero in countries with a lot of rich people. The result was a powerful first wave of financial repression.”
Dehn says that increasingly aggressive foreign policy in the West should make emerging market issuers and investors wary about future changes, such as political interference in the legal landscape.
Predicting that debt sanctions could quickly become a widely used instrument of foreign policy, Dehn says: “Emerging markets countries still rely heavily on New York and English law for issuance of bonds.
“Debt sanctions have not yet been adopted into English or New York Law, but the idea is gaining influence and finding willing backers in the context of the Russia-Ukraine conflict.”
Dehn likens recent developments to the events of the Cold War, seeing the Middle East, the Russian periphery and the Far East as potential battlegrounds.
This inevitably means a marginal negative for emerging markets such as Ukraine, which find themselves caught up in the geopolitical tensions, Dehn says.
However, the view at Ashmore, an emerging market asset manager with €56.9 billion of assets, is that emerging markets may be too strong for the West to control.
“The good news is that the majority of emerging markets countries are unlikely to become pawns in this game; controlling more than 50% of global GDP with vastly better macroeconomic fundamentals than developed countries they are simply too strong to be dominated.”
Earlier this month, Russell Indexes showed frontier and emerging market equity indices defying recent geopolitical disruptions.
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