Politics dominates the headlines but market impact limited

The escalation of political risks has dominated the headlines in EMs in recent weeks, but the fallout in financial markets has been surprisingly small. Equities in Russia and South Korea initially came under pressure following the increase in tensions in Syria and the Korean peninsula respectively, but the size of the losses were small and both markets have since stabilised. Meanwhile, the South African rand weakened against the dollar and bond yields rose following the President’s decision to oust his pro-market finance minister, but both the currency and bonds have since pared their losses. Finally, the “yes” vote in Turkey’s constitutional referendum actually triggered a small relief rally in local markets as investors focussed on the reduction in near-term uncertainties over broader concerns about the centralisation of executive power. So while political risks in EMs will remain heightened over 2017-18, for now it seems investors are taking them in their stride.