The market does not like uncertainty, which the forthcoming negotiations between the UK and the EU will supply in abundance. We are also facing a number of fateful governmental elections in several European countries and the election between Trump and Clinton will undoubtedly also contribute to the turmoil. If the political risk escalates in developed markets over the summer, does it make sense to look towards more exotic shores to find calmer waters?
Limited response to Brexit
Over the past five years, investors have fled from emerging markets, where the BRIC countries in particular have struggled with debt, political unrest, corruption and falling commodity prices. It has therefore been very interesting to follow the developments in these markets over the past week. The stock exchanges here have reacted with restraint and not exhibited the panic that has taken over Europe. It appears as though the risk of Brexit was already priced in at the same time as exposure to the UK is minimal for several of the markets. We therefore see the positive trend continuing whereby the emerging markets index has done significantly better than the developed markets index year to date.
Opportunities in emerging markets
The uncertainty in emerging markets is not yet over, however, so it would be foolhardy to name them the new safe haven. One of the bright spots of the UK's Leave vote may be that the Fed postpones its planned rate hike until the dust settles in Europe. This may mean further tailwind for companies in emerging markets. Given their historically low valuation and expected growth of 4.6 percent in 2017, emerging markets undoubtedly offer good opportunities for long-term investors. This will, however, require investors to be selective and search for healthy, good quality companies with a focus on earnings power.