Emerging markets have hit some nasty turbulence. The FTSE Emerging Markets index gained around 17% between February and mid-September then slid by 5% in nine days, its longest losing streak since 2001.
"The two moons that govern emerging markets are waning in unison," as the FT's James Kynge puts it. One problem is that recent data point to another slowdown in China, "the lodestar" for emerging-market commodity exporters.
Along with downturns in other major developing countries, notably India and Brazil, this is a reminder that the rampant emerging-market growth rates seen in the past decade won't return in a hurry.
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The other problem is US monetary policy. The US Federal Reserve will shortly finish its quantitative easing (QE money printing) programme and start to raise interest rates. This makes assets denominated in dollars, and the currency itself, more attractive to global investors.
And as the appeal of assets in the world's biggest, safest economy grows, traditionally risky assets, such as emerging-market stocks or bonds, become less appealing, so money starts to leave them.
In January, for instance, a short-lived bout of jitters about tighter Fed policy saw $12bn pulled from emerging-market stock funds in a month.
The impact of the Fed
US rate hikes can make life far more difficult for emerging economies. It leads to higher long-term interest rates for these countries, as global investors demand a higher premium to keep or put their money there, rather than in the US. That hampers growth.
Similarly, central banks are sometimes forced to hike short-term rates to stop their currencies from falling rapidly (thus stoking inflation), and to keep foreign money in the country.
That's especially likely if they are running a large current account deficit, and need foreign capital to plug their gap with the rest of the world.
For example, in the summer of 2013, the prospect of an end to QE and eventual interest-rate hikes led to a minor market panic the so-called taper tantrum'.
Indonesia and India, both countries with high current account deficits, saw major sell-offs as investors feared lower growth and higher inflation.
So, what impact will US rate hikes have? Possibly none. In the first year of the previous two Fed tightening cycles, emerging-market stocks did very well, notes Capital Economics. And the tightening should be very gradual.
While several states have current account deficits, most emerging markets have lower external financing requirements and more foreign-exchange reserves than they once did. And "investors are more willing to differentiate" between emerging markets today than they used to be.
A rocky ride ahead?
Still, we can't rule out instability. As Ambrose Evans-Pritchard notes in The Daily Telegraph, emerging markets as a whole will be more sensitive to rising rates than before, because overall debt is much higher, at a record 175% of GDP.
Emerging-market firms took advantage of rock-bottom rates to raise almost $2trn, mostly in dollars, between 2010 and 2013. So it will become more expensive as the dollar rises.
And while these firms used to borrow money from banks, says Gillian Tett in the FT, they have increasingly been selling bonds to asset managers in recent years. That means they are more sensitive to the global bond market than before.
We are grappling with "a data fog" too, adds Tett. Much of the debt has been sold through offshore vehicles, for instance. So there is some doubt as to how much there really is out there.
As 2008 showed, "in an interconnected world shocks have a nasty habit of cropping up where they are least expected". Emerging markets, and the global financial system, could be in for a very bumpy ride.
