Will a “taper tantrum” trounce emerging markets?

Tighter US monetary policy and a stronger dollar could see capital flood out of emerging markets, leaving turmoil behind. 

Are we heading for “taper tantrum 2.0”? asks Duvvuri Subbarao in the Financial Times. In 2013 concern that the US Federal Reserve might cut back – or “taper” – its quantitative easing (QE) programme triggered the “taper tantrum”, a sell-off that hit emerging markets hard; India’s rupee plunged by more than 15%. 

Now, as the Fed flirts with tighter monetary policy once more, policymakers have a feeling of déjà vu. No wonder. Many emerging economies have benefited from ultra-low interest rates in the developed world, which has sent investors looking for higher returns overseas. Tighter US monetary policy and a stronger dollar could see these capital flows swiftly reverse, leaving turmoil in their wake. 

Policymakers in poorer countries don’t just have financial markets to worry about, says The Economist. A global divide is emerging between wealthier countries, which are vaccinating quickly, and poorer nations still struggling to do so. 

“In the world’s poorest 29 economies… only 0.3% of the population has received even one dose of vaccine.” That will hamper growth. Strong recoveries in developed countries are also boosting global inflation. Brazil and Russia have been forced to hike interest rates in response, not ideal given that both countries are still fighting Covid-19. 

The taper tantrum saw the MSCI Emerging Markets index slump by 10% in four months, says Reshma Kapadia in Barron’s. But “things may not be as bad this time”. The 2013 crisis was amplified by trade and fiscal deficits in many emerging economies. With a few exceptions (notably Turkey and South Africa) most are better prepared for market storms today. Commodity exporters are also enjoying a windfall from the ongoing price rally. 

Recommended

When investors get over-excited, it’s time to worry – but we’re not there yet
Sponsored

When investors get over-excited, it’s time to worry – but we’re not there yet

When investors are pouring money into markets, it can be a warning sign of impending disaster, writes Max King. So how are fund flows looking right no…
26 Oct 2021
An investment trust that gives exposure to frontier markets
Investment trusts

An investment trust that gives exposure to frontier markets

An investment trust investing in small, illiquid emerging markets has disappointed, but deserves another chance, says Max King
26 Oct 2021
What does Rishi Sunak have in store for investors this Wednesday?
Budget

What does Rishi Sunak have in store for investors this Wednesday?

Rishi Sunak is unveiling his spending plans for the economy this week. John Stepek analyses areas which may be most hit by the budget.
25 Oct 2021
How rising interest rates could hurt big tech stocks
Tech stocks

How rising interest rates could hurt big tech stocks

Low interest rates have helped the biggest companies to entrench their positions. But what if rates rise?
25 Oct 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021