Emerging markets: turbulence ahead

Headwinds are gathering strength as the MSCI emerging markets index takes a dive.

The MSCI Emerging Markets index has slid sharply from early May's six-month high and a lasting rebound looks unlikely. Headwinds are gathering strength: the US economy is gaining momentum and a rise in US interest rates, the first in ten years, is consequently expected in the autumn. A higher yield in the world's biggest economy tends to lower demand for risky assets, and so implies that money is likely to leave emerging-market stocks and bonds.

Capital outflows are always difficult for countries with big current-account deficits, which need foreign cash to cover their shortfall with the rest of the world. Moreover, as world debt markets are priced off US ones, higher US yields may mean tighter monetary policy in emerging markets as well.

To make matters worse, many countries have piled on debt in recent years. Their total borrowings have hit 175% of GDP, an increase of 30% since 2009. Around $2trn of that is borrowings in US dollars, propelling the total to $4.5trn. High foreign currency borrowings add to risks, since they become more expensive to repay

as the US dollar rises against emerging-market currencies. Many emerging economies put off structural reforms during "the years of easy growth from cheap money and commodity earnings", says the FT. They are now bracing themselves for the worst turbulence since 2013. The worrying thing is corporate debt, says Paul McNamara of GAM. "There's been a tidal wave of issuance and... investors have rushed in without necessarily knowing about the idiosyncrasies of the market."

Recommended

Short squeeze
Glossary

Short squeeze

When a large number of short sellers target the same stock, the price can rise in a self-perpetuating circle known as a 'short squeeze'.
6 Dec 2021
Has the “jam tomorrow” bubble popped already?
Stockmarkets

Has the “jam tomorrow” bubble popped already?

Fund managers have had a good year so far. John Stepek looks at what to expect from markets until year end.
6 Dec 2021
Ewan Markson-Brown: the joy of small companies
Investment strategy

Ewan Markson-Brown: the joy of small companies

Merryn talks to Ewan Markson-Brown of Crux Asset Management about why when it comes to emerging markets, he much prefers to invest in micro- and small…
3 Dec 2021
Stockmarkets are trading on thin ice as Omicron variant spreads
Stockmarkets

Stockmarkets are trading on thin ice as Omicron variant spreads

The Omicron variant of Covid-19 is driving stockmarkets down, with travel and leisure stocks particularly badly hit.
3 Dec 2021

Most Popular

Three safe bets on the growing online gambling sector
Share tips

Three safe bets on the growing online gambling sector

Professional investor Aaron Fischer, creator of the Fischer Sports Betting and iGaming ETF, picks three of his favourite online gambling stocks.
29 Nov 2021
Making sense of the new minimum pension age rules
Pensions

Making sense of the new minimum pension age rules

The rules surrounding the minimum age at which you can start tapping into your retirement savings have been tweaked, but are still confusing. David Pr…
23 Nov 2021
Bubbles grow in global property markets as house prices continue to rise
Property

Bubbles grow in global property markets as house prices continue to rise

House prices grew by 6% in the year to mid-2021 in 25 global cities, with the German property market in particular showing signs of overheating.
3 Dec 2021