Traditionally emerging markets haven’t performed well in times of inflation in the United States. While most inflation predictions for the U.S. don’t put emerging markets in jeopardy, the latest inflation numbers and some predictions are raising red flags that all emerging market investors should be paying attention to. Steve Johnson reports in the FT:
Matters could yet become a little fraught, however, with some estimates for inflation starting to come uncomfortably close to the danger level for EMs.
Research by Daniel Salter, head of emerging market equity strategy at Renaissance Capital, an EM-focused investment bank, suggests that four of the five 30 per cent-plus falls in the MSCI EM index since its inception in 1987 occurred within one month of US consumer price inflation hitting 3 per cent.
While most forecasters are not pencilling in such an eventuality in the foreseeable future, it should perhaps not be entirely ruled out in the wake of recent data showing year-on-year US wage growth of 2.9 per cent in January, which seemingly provoked the current sell-off in global markets.
The reading came at a time when several forecasters were already revising their CPI forecasts higher. One major US bank has raised its estimate for annualised quarter-on-quarter CPI inflation as of March 2018 three times in January, from 2.1 per cent to 3 per cent. UBS is now also anticipating annual inflation of 3 per cent in the quarter ending in March.
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Jeremy Jones, CFA
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