Sticking to orthodox monetary policies is beginning to pay off for emerging markets. Having tamed inflation with higher interest rates and strict precautions, emerging markets are finally in a place to restart growth with rate cuts, according to a report by research and analysis firm Aberdeen.
The trigger for this resurgence in emerging markets is not a rebound in commodity prices, but rate cuts in response to falling inflation. It underlines the sustainability of this recovery trend.
This report comes just two days after the Indian central bank went ahead and announced a 25 basis points rate cut. The RBI expects retail inflation to remain around the 5 percent mark, at least in the near-term.
India Favoured Market
India is one of the most favourable countries in terms of market portfolio with the upcoming Goods and Service Tax Bill expected to boost investor sentiment, writes Devan Kaloo, head of global emerging market equities at Aberdeen.
India's new tax bill is expected to boost investor sentiment and exportcompetitiveness. The country is home to high-quality companies with good, long-term prospects.
Kaloo adds that countries such as Brazil, India, Indonesia and Mexico will continue to cut rates and will be able to navigate the potential rate hike from the Federal Reserve better.
Underscoring this decoupling, developing nations are better placed to cope with U.S. rate hikes and a strengthening dollar than in previous years, given that most now have flexible exchange rates and ample foreign exchange reserves.
The Developed Mess
While developing nations seem to be in a good place, developed nations are coming off as an "intractable mess".
The June 23 vote by the British public to leave the European Union increased political and economic risks, suggesting global monetary policy will be loose for longer. This has weakened the case for U.S. rate rises and should be supportive of emerging market equities and currencies. Certainly we don't expect the European Central Bank, the Bank of Japan, the Bank of England and the People's Bank of China to raise rates anytime soon.
Another concern flagged off by Aberdeen about China is its growing debt pile which may continue to weigh on corporate profitability in the country. Countries such as South Korea and Taiwan, have also failed to impress the research firm.
Read the full report here - ‘Orthodoxy behind revival in emerging markets'
Also Read: Bonds Rally as India's Monetary Policy Panel Cuts Rate at Debut
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