CIO View Special limt.art*torel Fatuity 2016 14 Risks to emerging markets Aside from U.S. high yield, emerging markets have been especially shaken up by recent turbulence. For emerging markets as a whole, the sell-off on the back of falling oil prices does not reflect deteriorating macro-economic fundamentals. Most emerging markets are net importers of oil. The same basic logic holds as for developed markets: lower oil prices should be a net plus for net importers. The problem is that the costs of oil-price declines are immediate and concentrated for producers. The benefits to consumers and corporates occur with often long and variable delays. In terms of market sentiment, gains will probably continue to be overshadowed by troubling headlines from leading oil producers, such as Venezuela, Russia and Brazil, struggling to adjust. For Venezuela, for example, oil accounts for 91% of export earnings. Oil dominates all parts of the economy: growth, exports and fiscal accounts. In an already fragile political environment, this is causing instability. Russia too was already in recession before the most recent decline in oil prices. At current oil prices and exchange rates, its budget deficit would rise above 5% of GDP, as Elke Speidel-Walz, our Chief Economist for Emerging Markets, points out. Brazil, by contrast, is a net importer, but exposed through Petrobras. In all these places and elsewhere, it is possible to come up with plausible scenarios, in which lower oil prices could trigger political instability, leading to further knock-on effects. The same is true in OPEC countries. Gulf producers have so far cushioned the blow by drawing down their vast holdings of foreign assets - probably contributing to financial-market volatility in the process. Opportunities in developed-market equities Given our overall assessment of how the fall in oil prices will impact key parts of the world economy, it should come as no surprise that we maintain our ov