Stanlib Economist Kevin Lings explains that the performance of emerging markets is still strongly linked to commodity prices, but this is changing as investors become more sophisticated.

Emerging markets attracted significant portfolio investment flows in the aftermath of the global financial market crisis. This partly reflected the global search for yield, in a world of exceptionally low interest rates, and also a search for growth. At the time, the economic growth in China continued to beat expectations and commodity prices prospered. South Africa was a clear beneficiary.

Since then, however, sentiment has slowly changed. The outright global search for yield has slowly dissipated due to the increasing expectation that the US Federal Reserve is evaluating a scaling-back of quantitative easing.

The growth in China and other emerging economies has systematically disappointed expectations. China is trying to restructure in order to achieve a more sustainable balance. And, understandably, commodity prices have softened. This could be signalling the start of a re-balancing in global portfolio flows, especially if monetary policy starts to normalise. It is still extremely early to ascertain if this change in investor sentiment is a phase or a longer-term trend. Under these circumstances bond yields will tend to rise, especially in emerging markets.

It is interesting to see that the global investment community still, to some extent, maintains a strong link between global commodity prices and performance of emerging market equities (see chart below).

Stated differently, investors still tend to view emerging market equities as a single asset class that is linked to the demand for industrial goods and commodities, and that there has been a slow acceptance of the fact that each emerging economy is very different in economic structure, and that economic objectives and policy objectives differ greatly. A similar argument can be made for how foreign investors view the Sub-Saharan African investment environment.