Investors’ enthusiasm for EM assets should return

Investors’ retreat from emerging markets over the past month has reflected growing concerns about the implications of the collapse in the price of oil. Admittedly, most countries (and the world as a whole) should be better off as a result of the collapse, including key emerging markets such as China and India. But the possibility that some major producers, such as Russia and Venezuela, will be hit so hard that the fallout from their problems offsets the more diffuse benefits to the larger number of winners has led to a general loss of appetite for risk. Accordingly, while the (quasi) floating currencies of the major net oil exporters have generally fallen the most so far in December, those of net oil importers that are perceived to be vulnerable to capital flight have also fallen sharply. These include the currencies of countries with large current account deficits (that should actually shrink as result of a lower oil price), such as Turkey, Brazil and South Africa.