EM outperformance over DM seen in wake of Brexit

It has been observed that emerging markets (EMs) have actually outperformed developed markets in wake of the Brexit outcome. Post-Brexit external conditions turned more conducive for the emerging markets.

The relatively strong performance of the emerging markets can be attributed to the following reasons:

- Most EMs have quite limited exposure to the uncertain prospects in UK and the EU economies. The US and other EMs are much more important trading partners for these countries.

- Fed’s monetary policy as one of the major EM drivers at the moment. A less hawkish Fed on the back of Brexit uncertainty is good news for many EMs with their significant dollar debt burden.

- Commodity prices rebounded after the Brexit vote, and rising commodity prices and stable growth prospects in China support emerging markets.

Neil Shearing, chief emerging markets economist at Capital Economics, summed up the mood of many, saying: “While the fallout from the vote is likely to weigh on EM asset prices over the coming days, the direct economic impact on the emerging world is likely to be smaller than what many fear”.

That said, politics and policy uncertainty are key risks in EM but given sizeable market falls in some markets, these risks are being more reflected in prices. For example, the MSCI China Index has fallen almost 40 percent since its peak in April 2015 in US dollar terms. Brazil, meanwhile, has fallen more than 40 percent for the same period, delivering losses in each of the last three years.