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    Emerging Markets: A safe haven from Brexit – Danske Bank Sandeep Kanihama

    Research Team at Danske Bank, suggests that it is probably a stretch to call emerging markets a safe haven however, unlike other global risk-off situations, emerging markets have actually outperformed developed markets in the wake of the Brexit outcome.Key Quotes“There are three reasons for the relatively strong performance in our view.1. Apart from Eastern European countries, most EMs have quite limited exposure to the uncertain prospects in Europe. Export shares are well below developed countries. The US and other EMs are much more important trading partners for these countries.2. A less hawkish Fed is good news for many EMs with their significant dollar debt burden. As a result of the uncertainty posed by a lingering Brexit risk in Europe, we have delayed our call on the next Fed hike from September 2016 to June 2017 and the market is even more dovish, pricing in a first full rate hike in January 2019.3. Investors are right to be uncertain about the future direction of policies in the UK and EU, a normal phenomenon in emerging markets. Investors do not like uncertainty. If they have to live with uncertainty in Europe, why not find a place for their money that pays adequately for such uncertainty, such as EM bonds.Hence, we maintain our positive view on EM (outside Brexit-exposed EMs).1. Equity. Tactical overweight in EM equity versus developed market equity, preferring Asia and China while being neutral on Eastern Europe and LATAM.2. Local currency bonds. The combination of a relatively stable outlook for EM currencies and high carry offers very attractive investment opportunities, notably in BRL, ZAR and RUB.Financial instability and the economic slowdown in China and a more aggressive Fed hiking cycle are far more important downside risks to EMs than Brexit.”


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