Emerging markets always find themselves on the receiving end of geopolitical and economic tensions and May was no exception, with stock markets giving up most of the gains achieved this year on broadening trade war tensions. The MSCI Emerging Markets Index slumped almost 8% during May in the face of investors disinvesting a massive $14.6-billion from emerging market equities, the largest monthly foreign investment outflow since June 2016.
But do emerging markets deserve to be subject to blanket sell-offs like these when risk-off sentiment takes hold? Or are there any countries in this universe that deserve different treatment? South Africa has always been at the receiving end of any emerging market sell-off because it has such liquid financial markets. This enables investors to get in and out quickly and efficiently and has sent the rand reeling in the past. This was evident last week when South Africa felt the greatest impact of investor rebalancing as Saudi Arabia entered the MSCI Emerging Markets Index, comprising 2.6% of the Index. It was the biggest daily outflow on record, with foreigners pulling R13.
Safety includes emerging market countries’ current-account positions, sovereign credit ratings and foreign exchange reserves. Reserves are scored on the basis of whether a country meets the International Monetary Fund’s adequacy ratio or not.
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