There’s no need to flee emerging markets

Buenos Aires, Argentina © iStockphotos
Argentina: “more naked than most of the swimmers”

“One nation’s currency crisis can trigger an entire region’s recession,” says James Dean in The Times. The Thai baht plunged in the summer of 1997 and the turbulence quickly spread throughout Asia. The worry today is whether Argentina and Turkey could be the first two dominoes to fall in a wider crisis.

Probably not, says Fidelity’s Tom Stevenson in The Daily Telegraph. As Warren Buffett likes to say, when the tide goes out you can see who has been swimming naked. Argentina and Turkey “are more naked than most of the swimmers today”. The environment for emerging markets has deteriorated rapidly in the past few months, with the higher dollar and prospect of US interest-rate rises drawing money away from traditionally risky assets. Investors become much less forgiving of “dodgy economic fundamentals” in these circumstances, and take their money out. Argentina irritated everyone by appearing to renege on a commitment to squeeze out inflation.

Turkey, meanwhile, is “up to its eyeballs in foreign-currency-denominated debt”. The banks owe 60% more in dollars than just five years ago. Turkey needs foreign cash worth around 25% of its GDP to cover its debts and repayments to the rest of the world. Most other emerging markets, however, aren’t nearly as vulnerable to foreign capital turning tail.

The broader pattern now is that fiscal and external – current-account – deficits have been reduced and “foreign-currency funding needs and inflation are in check”, says Swaha Pattanaik on Breakingviews. Investors have become more discriminating and no longer flee en masse when one or two emerging markets hit a rough patch; witness the resilience of the asset class during global market volatility in February. There is no need to run – just choose carefully.