Volatility Driving dispersion in emerging markets

Investors are facing a new era of volatility as the ultra-calm investment landscape of the second half of 2017 (see Figure 1) makes way for more turbulent terrain marked by higher inflation, tighter monetary policies, and choppy currency markets. It is likely that emerging markets (EM) in particular will be affected by this transition, posing a challenge to investors in the equity and debt markets of developing economies.

The volatility that has characterized markets so far this year has come in two stages. February’s spike in the Chicago Board of Exchange Volatility Index (VIX) was largely a technical event, driven principally by the huge amount of money that had accumulated in volatility-linked products. When the VIX initially rose on the back of inflation fears, these products were forced to rebalance, significantly amplifying the overall spike in volatility.