Emerging Markets (EM) have been pretty much in the limelight for the good part of H22015 particularly on the back of a marked deterioration in the commodities market but also due to the weaker economic backdrop and depreciation of EM currencies. The year-long depreciation of EM currencies from mid-2014 up to the beginning of September was highly volatile at times. However, apart from the large swings witnessed in the Russian and Brazilian currencies, the moves didn’t warrant the adjective of a crisis as many of the major EM economies managed to withstand the negative spill over effects in the past year. EM are more robust and better equipped to deal with crisis, however, there remains lingering structural risks from the massive build up in foreign currency liabilities and weakness in capital inflows.

Monetary policy in EM economies is more credible than in previous decades whilst inflationary expectations are better contained. Furthermore, banking systems are more robust whilst financial regulatory has improved markedly. This has enabled EM currencies (and subsequently their respective underlying economies) to be less susceptible to crisis.

During the month of October, EM benefitted from large inflows in credit markets and a relief rally ensued. Asset classes which had sold off in August and September, particularly the energy sector (Oil & Gas), Brazil, Russia, as well as the mining and metals sector were amongst the best performers in October. Apart from investors wanting to take advantage of beaten down valuations, this positive performance came on the back of supportive and accommodative central banks in China and the Eurozone, and a seemingly clearer path of interest rates as dictated by the US Federal Reserve.

Heading into the final sprint of 2015, the divergences in central bank policy is going to be the major theme ahead of key central bank meetings in December. Following over half a decade of accommodative stances, the Fed is on the verge of raising rates for the first time in almost 10 years whilst the ECB, the Chinese and Japanese central banks are contemplating more accommodative measures to keep their respective economies more supported. 2016 is expected to be characterised by the rate at which the US economy has managed to distance itself from external factors and how the weaker developed economies respond to the additional stimulus pumped in by central banks. The credit scenario in the use could prove to be benign as the economy continues to growth, as we expect rate increases by the Fed to be slower than in previous interest rate cycles, whilst European government bonds as supported by the ECB.

The recovery in EM is intact although it has seemingly lost steam of late. Going forward, I would expect China’s output growth and global commodity prices to continue to dictate asset price direction and sentiment in EM. The greatest risks to EM at this stage, I would say, primarily rest on the Fed’s interest rate cycle, and the pace at which subsequent rate hike are executed and fears of another dip in China’s output growth as the economy continually focuses on the ever need for deleveraging. In the short term, however, I would expect a temporary improvement in Chinese data to keep EM supported as the current loosening of the country’s fiscal and monetary policy is expected to be followed by positive cyclical behaviour. However, I would view this as an opportunity to take advantage of more favourable valuations by selling on market strengths as the outlook for EM remains shady to say the least.