In the midyear market outlook for 2015, Pangaro, said investors fear the twin threats of lower commodity prices and the relative US dollar strength combined might push emerging back two decades.
However, Pangaro, who is co-head of emerging market equities at the US asset manager, said the region is in a very different place than it was back then.
Back to the 90s
‘For some investors, the two headwinds to EM growth: lower commodity prices and the relative strength of the US dollar are evoking comparisons to with the EM crises of the 1990s', he said.
‘An appreciation of the dollar and falling commodity prices provided the backdrop for financial crises in several emerging economies in the 1990s. In that environment, central banks' ability to defend local currencies was severely tested, and many countries were forced to break their hard-currency pegs.’
Pangaro believes, while the current environment is somewhat similar, the growth outlook also depends upon individual countries' unique characteristics and not every emerging market is equally reliant on the US dollar.
‘Economies such as South Africa and Brazil that run current-account deficits are more vulnerable in a period of sustained US dollar appreciation than nations less dependent on foreign financing, such as China’, Pangaro said.
Pangaro also said lower commodity prices have damaged exporters such as Russia and other oil-exporting nations, but some Asian countries such as India have benefited from the price drop.
Overall, thanks to important structural reforms and improved macroeconomic policies, there has been a build-up of foreign exchange reserves and use of floating currencies, which, according to Pangaro, have increased the country's ability to withstand market stress and avoid currency runs.
Most emerging countries now also have lower sovereign debt-to-GDP than during the 1990s, and Pangaro also said many countries have converted the debt from US dollars to local currencies. From a management standpoint Pangaro is preparing to react to current headwinds.
‘We expect lower export growth in many EM economies to persist for a time, even if commodity prices and the US dollar stabilize’, he said. ‘This will mean finding companies that can ride out such a period, but that can also benefit in such an environment as their competitors struggle.'
The T Rowe Global Emerging Markets Equity fund returned 1.47% over the 12 months to the end of May 2015. This compares to a rise of 0.3% by its Citywire-assigned benchmark, the MSCI EM (Emerging Markets) TR USD, over the same period.