Emerging markets have benefitted from both improving fundamentals and bullish sentiment driving inflows to the asset class. Individual country risks, however, are poised to rise. Be selective.

Emerging market (EM) assets have mostly had a gangbuster 2017 across the board, from stocks to bonds and currencies. But some macroeconomic headwinds and “idiosyncratic” or country-specific risks appear to be gathering on the horizon, raising the question of whether their broad outperformance can extend into 2018.

Performance dispersion between individual emerging markets looks likely in the year ahead, suggesting that investors should carefully pick their spots. In an interesting recent research note, Cesar Massry of Goldman Sachs points out that emerging markets are moving from “asset class” risk to “country stories.” Investors, particularly those in passive emerging market products, could be forgiven for overlooking looming risks in a number of developing markets, given the strong performance of the asset class as a whole.

Emerging market equities climbed around 32% over the first eleven months of 2017, while the advances among dollar-denominated and local currency EM bond indices ranged from 9% to 13%. Emerging market currencies have been the laggards, though with gains generally running in the mid-single digits, they’ve performed quite admirably, particularly given three U.S. Federal Reserve key interest rate hikes over the last year.

Have the strong returns been driven by broad “risk-on sentiment” and a high tide of portfolio inflows, or real progress on the ground in emerging markets? “We certainly see the bull run this year as being driven by both a healthy risk-taking environment and fundamental improvement, but find that ‘country risk’ is starting to increase across EM assets,” Massry notes.

It’s clear that country-level performance-both positive and negative-across the four asset classes in several emerging markets is highly correlated. In recent months, for example, Korean stocks, the won, and sovereign credit (if not its local won bonds) have posted solid gains, as have Peru’s stocks and bonds (both dollar and local currency), although the sol has just stood its ground against the greenback. The strong recent performance in the technology and commodities sectors likely proved to be tailwinds for the two countries, respectively.

Yet at the other, negative end of the correlation spectrum, in which the four asset classes mostly shed weight, sat Turkey, Mexico and South Africa. Equities from sub-Saharan Africa’s largest economy did post gains as South African stocks tend to move inversely to its currency, which took a beating over the last couple months. “These three EMs are quite sensitive to movements in the U.S. 10-year rate, but also have considerable political risks surrounding them that have escalated in recent months,” Massry points out.

Political risks are, typically, hard to quantify. South Africa’s ruling African National Congress is beset by infighting just weeks ahead of a scheduled party vote to replace the unpopular President Jacob Zuma before the presidential elections in 2019. In Mexico, leftist Andres Manuel Lopez Obrador is leading in polls in the prelude to the country’s general election next May, while the potential revamp of the North American Free Trade Agreement is also weighing on sentiment toward Mexican assets. And in Turkey, voters in April approved a draft constitution that changes the country’s governance from a parliamentary to a presidential system, scrapping the post of prime minister and greatly expanding President Recep Erdogan’s powers.

Political risks, though, can have discernable impacts on markets. Erdogan, for example, has been aggressively pushing the country’s monetary authority to refrain from raising interest rates, even though inflation is hovering near 12% and the lira has been in near free fall since the start of the fourth quarter. Nonetheless, he recently declared that the central bank’s rate policy was on the “wrong path.” Given Turkey’s inflation and foreign exchange dynamics, not to mention a current account deficit running at 6.4% of gross domestic product (GDP), Erdogan’s preferred course correction will prove highly challenging.

Expectations for continued monetary tightening in the U.S. next year as well as reduced monetary accommodation in Europe will no doubt represent headwinds for Mexico and South Africa, both of which also run current account deficits, though at 1.9% and 2.4% of GDP, respectively, they aren’t nearly as problematic as Turkey’s.

Of course, they aren’t the only emerging markets with political risks. Brazil, Indonesia, Colombia, Thailand, Malaysia and Russia all have elections scheduled in 2018. Given a current account hole to the tune of 3.5% of GDP, Colombia also exhibits vulnerability to macro shocks through the current account.

The upshot for investors in emerging markets is that performance dispersion within the asset class next year is likely to be far higher than it was in 2017, suggesting that they should consider not just individual stock stories, but country stories, as well. Those with a longer-term focus can also benefit if valuations fall on political noise amid otherwise strong corporate fundamentals.

Take Mexican financial Grupo Financiero Banorte. As Thornburg’s Pablo Echavarria points out, “from 17.7x price-to-earnings in 2014 to 10.8x forecast 2019 P/E, Banorte has gone from being one of the most expensive banking stocks in Latin America to the one of the cheapest.”

Emerging markets aren’t a homogenous lot. Rather, they are a heterogeneous assortment of countries with varying economic drivers and risks. Appraising the individual stocks for their earnings prospects, operating contexts and the relative attractiveness of their valuations will be more imperative next year than it has been in 2017.

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