Commodities form a link in the virtuous circle for emerging markets

While the fortunes of emerging markets are not solely tied to the outlook for commodities, the recent bounce offers yet another reason to be optimistic.

The rally in commodity prices over the past six months has been fairly broad based and this will have an obvious benefit to commodity- exporting countries as, all things being equal, one would expect higher nominal exports to translate into stronger economic growth for export-dependent economies.

Rising commodity prices can help improve these countries’ balance of payments position and, in turn, reduce current account deficits. Currencies of commodity exporters are also likely to be well supported, something which could potentially raise the appeal of local currency strategies.

Since the end of last year, key exporters. such as Russia and Brazil, have demonstrated a strong pick-up in economic growth. But other major importers, such as China, are also faring well, highlighting the positive effect of other key themes at play in the emerging world.

Global data across both the developed and emerging world continue to improve—marking the first co-ordinated cyclical upswing for many years. The cyclical growth backdrop remains supportive for emerging market assets and current conditions have historically been associated with increased capital flows in to emerging economies. In combination, these factors could override the dampening effects of political and fiscal uncertainty stemming from the developed world.

Rodica Glavan – Insight, a BNY Mellon company

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