Investment in Emerging Markets Amid Inflation Concerns? ... Focus on Brazil

[Asia Economy Reporter Song Hwajeong] As concerns over inflation grow, a negative impact on investment sentiment in emerging markets is expected. Attention should be paid to emerging countries that proactively respond to inflation risks. KB Securities identified Brazil, which is expected to benefit from rising commodity prices, as the top preferred investment destination among emerging markets.

According to KB Securities on the 15th, the inflation trends in China and the United States are expected to transfer to emerging markets, creating a burden. The US Consumer Price Index (CPI) for April rose 4.2% year-on-year, exceeding expectations. China's April Producer Price Index also increased 6.8% year-on-year, surpassing market forecasts. Lee Changmin, a researcher at KB Securities, explained, "As inflation risks increase, emerging market central banks face the burden of having to shift from accommodative monetary policies earlier than expected. Excluding Argentina and Turkey, inflation in April in South American countries Brazil and Mexico exceeded 6% year-on-year, and Russia recorded inflation in the 5% range for four consecutive months, prompting a 50 basis point policy rate hike in April."

At this point, the key conditions for maintaining investment sentiment in emerging markets are the expansion of COVID-19 vaccination and enhancing the credibility of monetary policy aimed at price stabilization. While the expansion of COVID-19 vaccination alone is not a variable that determines stock market direction, slower vaccination progress and strengthened vaccine nationalism will lead to economic activity slowdown and weakened economic recovery. The researcher stated, "If the credibility of price policies is insufficient and external factors intensify price pressures, the worst-case scenario for risk assets?stagflation (GDP decline, CPI increase)?becomes increasingly likely. Although controlling external variables is difficult, emerging markets that aim to meet at least these two conditions will show differentiated investment performance."

The gap between developed and emerging market stock markets is expected to continue for the time being. According to Morgan Stanley Capital International (MSCI) data on the 12th, the second-quarter performance of developed and emerging markets was 2.3% and -0.1%, respectively, showing better performance in developed markets. The researcher said, "The performance gap between developed and emerging markets, which widened after March, is unlikely to narrow quickly. Rather than broad investment across emerging markets, concentrated investment in select countries is expected to yield better results. We suggest a short-term increase in weighting for the Brazilian stock market, where strong price control commitment, a peak in COVID-19 spread with increasing mobility, and continued benefits from rising commodity prices are enhancing price attractiveness."

This content was produced with the assistance of AI translation services.