Malaysia is not the only country in Asia exhibiting such fundamentals. Korea and Taiwan, for example, also have significant foreign currency reserves, and such characteristics are just one of the reasons why I prefer emerging Asia over other emerging markets. In addition to increasingly competitive currencies, countries in emerging Asia have recently demonstrated greater willingness to consider and implement market reforms, and they’ll likely experience better growth than their emerging market counterparts. Korea and Taiwan, along with countries like Mexico, are also levered to U.S. growth and are likely to enjoy a bounce if the U.S. economy accelerates in the back half of the year.

On the other hand, both Poland and Turkey are more at risk than other emerging economies. Though Poland’s economy is in relatively good shape, the country has consistently run a current account deficit since 2005, according to the World Bank, and its foreign reserves are relatively depleted compared to those of other emerging market economies.

These characteristics have diminished Poland’s attractiveness to investors in the past–according to Bloomberg data, the MSCI Poland Index has consistently underperformed the broader MSCI EM benchmark over the last 10 years. This underperformance could continue should a Fed rate hike lead to capital outflows. Meanwhile, Turkey’s economic imbalance similarly puts it in a position of vulnerability.

To be sure, it’s hard to predict exactly what will happen to emerging markets when the Fed raises rates. However, the fundamentals above are worth considering when focusing on emerging market exposure in a rising interest rate environment.

 

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.

Grant Dechert, a researcher working with Chief Investment Strategist Russ Koesterich, contributed to this post.