RICHARD DUNBAR

The period since the Brexit vote has been, to put it mildly, an interesting time. Following the unexpected outcome, many equity markets have reached new highs. Bond yields, meanwhile, have plumbed depths not seen, in many cases, for centuries – or indeed ever. All this has been engineered, in part, by a central-banking community pulling what may be its last monetary lever. With central banks appearing to have done pretty much all that they can do, the responsibility for stimulus passes to governments, with considerable expectation that they will now take their feet off the fiscal brakes.

Amid all the various forms of stimulus-related euphoria, some of the most interesting developments have been in emerging markets, both debt and equity. July saw the biggest-ever inflow into emerging equity markets and emerging debt markets have seen similar enthusiasm from investors. But what should the renewed enthusiasm for this asset class be attributed to, given that it has so often been eclipsed by others in recent quarters?

First, following the Brexit vote investors may be trying to escape from the epicentre in case of resultant aftershocks. Given the performance of risk assets, they seem, for the time being, to have deemed Brexit a local difficulty rather than a global one. However, there may still be an element of a desire by investors to park some of their investments as far away from any potential trouble as possible. The developing world fits the bill.

Secondly, and related to this, is the well-known fact that the developed world’s consumers and governments are a little short of cash. Although some emerging markets are in the same position, many are not. This is in stark contrast to some economies closer to home, and is therefore an undoubted attraction. It also gives many of these countries the potential for some monetary policy response should times get a little tougher – not an option available to many central bankers in the developed world.

A stronger dollar is another factor that has worried potential emerging-market investors, given that it is seen as having the effect of sucking liquidity out of developing economies, which is never helpful. But although a stronger dollar has been much forecast and much talked about, of late it’s been the ‘dog that hasn’t really barked’. It’s certainly a risk, particularly now that rising US interest rates seem to be back on the agenda, but perhaps not the risk it’s been made out to be.

The performance of the Chinese economy has also been a perennial worry for all things related to emerging markets and, to be fair, there are some reasons to be concerned. But there has also been a substantial policy response – one that seems likely to satisfy even the worriers for some time yet.

Finally, and importantly, there are things worth buying. There are high-quality companies on reasonable valuations to buy across the emerging-market spectrum while in the debt markets there are some good companies and countries to lend to. This is another reason why these markets are proving so popular with global investors.

Many markets are performing well in this peculiar environment for reasons that have as much to do with liquidity flows as market fundamentals. But amid all the post-Brexit turmoil, it’s just possible that the very real strengths of areas of the developing world are finding favour on fundamental – and therefore durable – grounds. For emerging-market investors, things have been developing nicely in recent weeks. We look forward to watching how they play out in the longer term.

Richard Dunbar is investment director at Aberdeen Asset Management