Investors must be aware of the geopolitical risks that could affect emerging markets, says Standard Life Investments.
Speaking to InvestorDaily, Standard Life Investments economist Alex Wolf said geopolitical risks, like the South China Sea, remain “possible”.
Mr Wolf said when evaluating such risks, a scenarios analysis needs to be utilised in order to model the impact of that risk to markets.
In terms of the South China Sea, he pointed out that a major impact would be to trade routes.
“If, for geopolitical reasons, trade were to sour [in Asia] then China is going to use [its] very large market and control over [its regional neighbours] as a political tool,” Mr Wolf said.
“It’s something that we keep an eye on but not something that we actively trade.
“It’s too hard to model and to understand what the different possibilities are,” Mr Wolf said.
Mr Wolf added that when looking at emerging markets, a country-specific approach is necessary.
He said investors can no longer look regionally as there is a clear breakdown of “winners and losers” due to government policy and terms of trade.
Mr Wolf pointed out that Indonesia, buoyed by falling oil prices, is emerging as an attractive market. As oil fell, according to Mr Wolf, the Indonesian government cut subsidies and allocated the revenue to infrastructure spending.
“So that should kick-start growth. It does stand out as a relatively positive [emerging market].”
Although the falling oil price has highlighted the “winners and losers” in emerging markets, the full benefit of the price drop is yet to be felt.
“It is asymmetric, so the losses are felt by the oil producers immediately, but the benefits take longer to filter through the system.”