Emerging-market exodus

A 10% slide in emerging-markets stocks could be a signal that the bull run has come to a grinding halt.

The emerging-markets (EMs) boom looks to be over. The MSCI EM Index has slid by 10% from its early May level and EM bonds have posted a similar drop. The South African rand and the Indian rupee have fallen by 10% and 7% against the dollar respectively in the past six weeks. The exodus of capital from EMs has fuelled fear of potential crises.

Sentiment has switched largely because of the US Federal Reserve's hints that it will slow the pace of its quantitative-easing programme. That raises the prospect of higher yields as monetary policy is tightened, which would push up the dollar. So US assets have become more appealing compared to their riskier EM counterparts. Disappointing recent growth figures, the related downturn in commodities and political upheaval in some states, such as Turkey and South Africa, have also hit confidence.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

"Even the shallowest of turns in America's monetary cycle is amplified" in EMs, notes The Economist. Market interest rates are rising in some countries as foreign buyers for local bonds dry up. Foreign money draining away from EMs undermines growth prospects, while a slide in the currency can fuel inflation, precluding an interest rate cut to boost growth. Indeed, sometimes a central bank will be forced to raise interest rates to make the currency more appealing: witness Indonesia's move last week.

The countries most vulnerable to capital outflows are those with current-account deficits: they spend more abroad than they take in, and need foreign cash to bridge the gap. The foreign money can disappear especially quickly if it is made up mostly of investments in stocks and bonds so-called hot money' that can leave easily rather than foreign direct investment projects. Enter Turkey and India, whose currencies have been among the biggest fallers in recent weeks.

Advertisement - Article continues below

Another problem in the past has been a sharp slide in local currencies causing a surge in the value of foreign-currency debt, says Capital Economics, a consultancy. The recent flood of capital, however, went mostly into local-currency bonds, as The Economist points out. But there is still ample scope for panic selling in EMs to cause severe trouble. If only a fraction of the estimated $4trn that has flowed into EMs since 2009 "is yanked out by jittery investors, it would turn a sell-off into a rout".



Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
Stock markets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019

Emerging markets bounce back after a miserable few months

Investors in emerging markets have been enjoying some long-awaited relief after a miserable few months.
13 Sep 2019

Most Popular


Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020

Where will markets be in 2030? Here are 20 forecasts for the 2020s

A lot has changed in the last ten years – stockmarkets soared, technology transformed our lives and politics has changed beyond measure. Here, Dominic…
14 Jan 2020
Personal finance

How much the state pension will rise by this year

While Boris Johnson promised to hold a full budget within 100 days of his election victory, many of the details of next year’s state pension increases…
10 Jan 2020

Money Minute Wednesday 15 January: UK inflation and house prices

In today’s Money Minute, we look ahead to the latest UK inflation and house price figures, plus we have Germany’s GDP data for 2019.
15 Jan 2020