Is It Time To Exit Emerging Markets? (Part 3 of 5)
2. Falling Inflation:
A second factor supporting emerging market equities is that inflation continues to decline in most emerging markets, Brazil and Russia being noticeable exceptions. For instance, over the past nine months, inflation in China has fallen from 2.4% to roughly half that level, while inflation in India has decelerated to around 4.5% from 8.8%. Lower inflation should provide for some multiple expansion in emerging market stocks.
Market Realist – Emerging markets could benefit from falling inflation
The graph above shows inflation levels in some of the biggest emerging markets (EEM). As you can see, inflation in Brazil (EWZ) and Russia (RSX) remains high, at 6.6% and 9.1%, respectively. On the other end of the spectrum, South Korea (EWY) and China (FXI) have inflation levels well below 2%.
One of the main reasons for the dip in inflation is the drastic dip in oil (USO) prices. This is a positive for oil importers like India (EPI). India imports 70% of its oil requirements.
Also, consumption has remained subdued in many emerging markets. This has put downward pressure on inflation too. Low inflation could stem the depreciation in emerging market currencies, which could lead to better currency-adjusted returns.
Inflation has been a problem in emerging markets perennially. However, that problem has abated lately. But emerging markets do face other issues, like red tape and political instability.
Read the next part of this series to see which emerging markets to invest in and which to avoid.
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