As the pendulum of economic growth has swung in recent years towards fast-growing economies, global capital has followed in its path. In the process, emerging market currencies have evolved into a distinct generator of investment returns, and a new source of potential risk.
One of the lessons of the global financial crisis is that investment diversification is increasingly challenging in a globalised market. Economies rise and fall together, and emerging markets are unable to escape the shifting fortunes of Europe and the US. The rise in correlation was starkly illustrated in the second half of 2011, when concern over eurozone sovereign defaults prompted a rush for the exit from emerging market assets that had previously seemed insulated from remote concerns.