Emerging markets are battered by a perfect storm

Emerging-market assets were hammered this week, with the benchmark MSCI Emerging Markets index slipping to a two-year low.

Emerging-market assets were hammered this week, with the benchmark MSCI Emerging Markets index slipping to a two-year low. It has lost around 11% in 2015 alone. The JP Morgan Emerging Market Currency index, which measures the most frequently traded developing-country currencies against the dollar, has fallen to its lowest level since inception in 1999.

Recent economic data have reinforced investor bearishness: emerging-market exports recently saw their worst year-on-year decline since 2009, while GDP growth in many southern Asian states has dwindled to post-crisis lows.

What the commentators said

Several factors that have rattled emerging markets on and off in the past few years are coming together, as Elaine Moore and Naomi Rovnick note, also in the FT. One key problem is the fall in commodity prices, which has turned into a rout in the past few weeks. That has been driven by China's slowdown.

Lower raw materials prices dent exports and reduce consumption by cutting people's incomes. According to Capital Economics, year-on-year retail sales growth in countries that are net exporters of commodities slipped to a six-year low of 2.6% in May. Retail sales in commodity importers remained buoyant, with growth of 7.7%.

Meanwhile, China's slowdown has hit Asian export growth, while developed-world growth does not appear to be robust enough to make up for it. The International Monetary Fund has trimmed its global growth forecast for 2015 to 3.3% from 3.5%. Political and structural problems, such as a lack of investment in Brazil and sanctions in Russia, have also sapped momentum.

Finally, US interest rates are set to rise this autumn, which draws money away from traditionally risky assets, such as emerging markets. Countries with large current-account deficits (which need foreign money to cover their shortfall with the rest of the world) are especially vulnerable when foreign money leaves. A falling currency also stokes inflation, leaving scant scope for interest-rate cuts. None of this will go away quickly. "We'll be talking about the risks of emerging-market currencies for some time," said Standard Chartered's Will Oswald.

Recommended

Three top-notch Asian stocks to buy
Share tips

Three top-notch Asian stocks to buy

Professional investors Adrian Lim and Pruksa Iamthongthong, managers of the Asia Dragon Trust, pick three of their favourite Asian stocks to buy now.
23 Sep 2022
Seoul attempts to close the “Korea discount” for stocks
Emerging markets

Seoul attempts to close the “Korea discount” for stocks

South Korean stocks suffer from the “Korea discount” – with the country still classified as an emerging market, investors are reluctant to pay a premi…
21 Sep 2022
India’s economy has come a long way in 75 years, but where next?
Emerging markets

India’s economy has come a long way in 75 years, but where next?

India has come a long way since independence to become the world's fifth-largest economy. But early mistakes and now a divisive leader are holding bac…
12 Sep 2022
Brazilian stocks will bounce back in 2023
Emerging markets

Brazilian stocks will bounce back in 2023

Brazil's Ibovespa stockmarket index has fallen by 9% since it peaked in April. But with an election in 2023 and current president Jair Bolsonaro on co…
7 Sep 2022

Most Popular

Beating inflation takes more luck than skill – but are we about to get lucky?
Inflation

Beating inflation takes more luck than skill – but are we about to get lucky?

The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank…
26 Sep 2022
The pick of this year's best-performing investment trusts
Investment trusts

The pick of this year's best-performing investment trusts

Market conditions haven’t been easy, but these investment trusts have delivered strong growth, says David Stevenson.
23 Sep 2022
The hidden cost of employee share schemes
Investment strategy

The hidden cost of employee share schemes

Paying employees in shares comes at a cost to investors – but it isn’t always easy to see how much, says Stephen Clapham.
26 Sep 2022