Advertisement

A panic attack in the developing world as emerging markets sell off

Investors once attracted by exotic growth stories have fled higher-risk emerging markets.

"The salad days for emerging markets are over," says the Financial Times. Last week saw a bout of "near-panic" as investors once attracted by exotic growth stories fled back to traditionally less-risky assets in the developed world.

US government bond yields fell (so prices rose) and the Japanese yen strengthened, as a Bloomberg index of 29 emerging-markets currencies fell to its lowest level since April 2009.

Advertisement - Article continues below

The Argentinian peso fell 12% last Thursday alone to a record low against the US dollar. The Turkish lira also hit yet another record low against the greenback, while the South African rand fell to its lowest point in five years.

Stock markets have also fallen hard. The MSCI Emerging Market Index, having dropped by 4% in as many days, is now down almost 6% for the year. Funds tracking Chile and Brazil slumped by over 5% last week. The jitters also engulfed developed stock markets.

A toxic cocktail of worries

Recent economic data suggests that manufacturing activity is shrinking. There was also the near-default of a trust loan (a high-yielding investment product sold to wealthy individuals, with the money used to fund business projects) that reminded investors of all the dodgy loans lurking in the shadow banking system, which made up a third of total credit last year.

Advertisement
Advertisement - Article continues below

China's slowdown has hit confidence in emerging-market growth, especially commodity exporters.

Advertisement - Article continues below

Investors are also nervous, because it's clear "the rich world's central bankers do not have much of a clue how to tame the beast they have created in the form of ultra-loose monetary policy", says Economist.com's Free Exchange blog.

Last week, the Bank of England all but abandoned the forward guidance' framework it put in place only six months ago, because unemployment has fallen much faster than expected.

No one is sure when Western central banks will raise interest rates. But when they do, higher rates will likely attract money away from risky assets such as emerging markets as the West becomes more attractive.

"Normalising central banks' balance sheets is going to be mightily unpredictable and disruptive," says the Free Exchange blogger.

Is this the start of a crisis?

There has long been downward pressure on the peso as the market has tried to price in this poor macroeconomic backdrop. Last week, the government bowed to the inevitable and stopped spending its dwindling foreign-exchange reserves on propping up the currency.

Advertisement - Article continues below

Similarly, Turkey's government has put pressure on the central bank not to raise interest rates to stem the slide in the lira. This has made investors worry all the more about Turkey's current-account deficit a classic emerging-market weak spot, as we explained last week.

Still, investors "shouldn't rush to assume a new crisis is underway", says Richard Barley in The Wall Street Journal. In a classic emerging-market crisis, states with the same or very similar problems all slump like falling dominoes. This time the markets are suffering from a wider range of local problems.

In any case, they look less shaky than during their last crisis in the late 1990s, as they have built up foreign-exchange reserves, are borrowing less in foreign currencies, and have flexible rather than fixed exchange rates.

This flexibility makes it easier to adjust gradually to slowdowns, or money fleeing back to developed markets. And the selling makes our favourite emerging markets, including Mexico and South Korea, look better value.

Advertisement
Advertisement

Recommended

Visit/investments/stockmarkets/600688/bullish-investors-return-to-emerging-markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Visit/519872/beware-the-hidden-risks-when-investing-in-emerging-markets
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
Visit/517688/the-british-equity-market-is-shrinking
Stockmarkets

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
Visit/517395/emerging-markets-buy-when-the-news-is-bad
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

Most Popular

Visit/economy/uk-economy/601427/covid-bounce-back-loans-and-inflation
UK Economy

What bounce back loans can tell us about how we’ll pay for all this

The government will guarantee emergency "bounce back loans" for small businesses hit by Covid-19. Inevitably, many businesses will default. And there'…
1 Jun 2020
Visit/investments/commodities/601433/commodities-possibly-the-biggest-opportunity-in-todays-markets
Commodities

This looks like the biggest opportunity in today’s markets

With low interest rates and constant money-printing, most assets have become expensive. But one major asset class hasn’t. John Stepek explains why com…
2 Jun 2020
Visit/economy/global-economy/601420/james-ferguson-the-virus-the-lockdown-and-what-comes-next
Global Economy

The MoneyWeek Podcast: James Ferguson on the virus, the lockdown, and what comes next

Merryn talks to MoneyWeek regular James Ferguson of Macrostrategy Partnership about what's happened so far with the virus; whether the lockdown was th…
28 May 2020