US holds the key to emerging markets' prospects

2018 has proven troublesome for investors in emerging markets. Both equities and bonds have suffered heavy declines as rising US interest rates and a stronger dollar caused investment flows to reverse course. Sentiment has been further undermined by an escalating trade war between the US and China, and a slowdown in Beijing's economy.

Initially, Argentina and Turkey took centre stage, with both nations' currencies plunging to record lows as investors pulled money from the two countries seen to be especially reliant on foreign capital.

However, the selling has spread further afield as investors try to assess which other countries are most vulnerable to a tightening of global monetary conditions. With the MSCI EM equity index down by more than 17 per cent in US dollar terms from its January peak and bond indices having fallen sharply too, the big question facing investors is whether emerging markets are over the worst, or whether the situation could deteriorate further.