Emerging markets are gaining support as falling oil prices and a stronger outlook for Brazil improve sentiment towards developing economies.
Brazil is at the centre of the move after its first-round presidential election produced a result that has encouraged investors to reassess the country’s economic outlook. The performance of Flávio Bolsonaro has increased expectations of a potentially more market-friendly policy direction, with fiscal policy and interest rates likely to remain key areas of focus.
Brazilian assets have responded positively, with the country’s equity market and currency benefiting from improved investor confidence. The prospect of greater fiscal discipline and a potential reduction in interest rates is encouraging investors to look more closely at Brazilian equities following a period of elevated borrowing costs.
A more positive view of Brazil could also benefit emerging markets more broadly. Brazil is one of the largest economies in the developing world, meaning changes in investor sentiment towards the country can influence perceptions of the wider emerging market sector.
Lower oil prices are providing another source of support. Cheaper energy can help reduce inflationary pressure in economies that rely heavily on imported oil, potentially giving central banks more room to reduce interest rates. Lower energy costs can also support consumer spending and corporate profitability in oil-importing economies.
The combination of lower oil prices and improving expectations around monetary policy is creating a more favourable environment for emerging market assets. Investors are increasingly able to look beyond immediate economic pressures and focus on potential opportunities created by attractive valuations and changing interest-rate conditions.
The investment case for emerging market credit is also receiving support from new long-term data. Updated figures covering decades of private, public and sovereign lending provide a broader picture of defaults, recoveries and investment returns across developing economies.
The data strengthens the ability of investors to assess emerging market credit risk and potential returns over longer periods.
