The year started out looking peachy for emerging markets until the US took down Iran's most powerful general. But underlying the risk-on, risk-off gyrations of the financial markets is a more worrying state of affairs. The five-year-plus underperformance of emerging economies relative to developed economies is undermining their long-held investment proposition.
While 2020 started off on a very positive note, geopolitical tensions were a keen reminder that the year is unlikely to be smooth sailing for any country, let alone emerging markets.
The outlook for emerging markets was considered relatively upbeat until the US decided to poke the bear by assassinating Iran's most powerful general in Baghdad. The surprise attack temporarily halted the bullish upward march in stock markets, which had been building on 2019's spectacular returns. Fortunately, the US and Iran quickly de-escalated tensions and averted pessimistic prognoses of an imminent World War III.
But the aggressive US military stance and the footage of Iranian missiles taking out an Iraqi airbase hosting US troops did prompt investors to revisit their sanguine views of the world economic outlook. These events highlighted the vulnerability of the world economy to geopolitical developments.
Prepare to hunker down for an unpredictable ride because it...