Identifying vulnerabilities key to choosing emerging market investments

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A global investment manager says differences in financial vulnerabilities can help investors choose the emerging markets to invest in for 2016.

Standard Life Investments has said emerging markets have experienced a run of relative underperformance, and 2016 will see further headwinds. China's slowdown, weak commodity prices, higher short-term US interest rates and a strengthening US Dollar could put pressure on emerging markets.

"In May our heat map proved to be a useful indicator of subsequent asset price movements. Countries like Hungary, Korea and Russia showed relatively low risk and generally fared better than those at the higher end of the spectrum such as Brazil, Turkey and Peru. Looking forward, widespread currency depreciation has helped to reduce external imbalances in many countries, although domestic imbalances remain widespread and will take much longer to be addressed," Standard Life chief economist Jeremy Lawson said.

Lawson said Venezuela and Egypt remain the highest-risk countries for investment, while Brazil and Malaysia have lowered their risk score. He pointed to other markets as showing volatility as well.

"Turkey’s external vulnerabilities are unchanged broadly, despite the benefits of the drop in oil prices. Whilst Colombia’s external variables improved marginally, this was offset by rising domestic imbalances. The outlook for fiscal balances has deteriorated notably in Latin America and Russia, and a marginal worsening of domestic balances led to a slight increase in risk for India, Indonesia, Mexico and The Philippines.”

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