Historically, one of the remedies available to a country facing a run
on its currency is to raise interest rates which is designed to make a
currency more attractive. The dilemma is that if the emerging market
central banks choose to defend their currencies with higher interest
rate policies then it would begin to undermine economic growth. But if
they do not see some relief on the currency front, this will eventually
invite inflation for those countries whose economies tend to run
current account deficits due to higher levels of imports.
Looking at this brief outline of the challenges facing the emerging
markets, it would be easy to ignore them from an investment
perspective. However, it can be argued that these countries are worth
some consideration for inclusion into investor portfolios. Combined,
the emerging market economies contribute slightly more to total global
GDP than the developed countries. However, for the first time since
2007 the developed countries will contribute more to global growth in
2013 than the emerging market nations.
As investor capital has moved from the emerging markets to the U.S. in
record amounts in the last several months, it has created a valuation
story in the emerging markets. Some of these countries are seeing their
stock markets trade at a lower Price–to-Book valuation than during the
financial crisis. At the very least, the panic has created an
opportunity for investors to consider adding exposure to non-North
American assets to their portfolio.