Emerging Markets to Benefit From Receding ‘Permarisk’
The global economy continues to be trapped in a sense of ‘permafrost’ – subpar, yet positive, growth – even as policy makers are taking more decisive action to ease the feeling of ‘permarisk’ that is characterized by a fear of tail risks, or a state of longstanding heightened risk in which investors fear something very wrong may be about to happen. This reduction in tail risks is enough to change the economics of investors’ exposure to the different emerging markets asset classes.
We believe the market will operate as if three defensive puts are in place:
Put 1: on European risk by the European Central Bank;
Put 2: on U.S. yields by the Federal Reserve
Put 3: on emerging markets growth by China.