There is a lot of turmoil going on in emerging markets right now. So much so that many are now considering it a full crisis. So far, though, the problems have yet to materially impact US markets. However, Barron’s explains that there is a mechanism through which EMs could cause trouble for the US and the rest of western markets. Because the trade war with China continues to escalate, the country’s yuan may devalue significantly, hurting all EMs. If this happens, the ripple effects through the global economy might be very strong. India and Mexico seem to be the safest EM destinations at present.
FINSUM: China is big enough to bring down the whole world economy, so the real threat here is the trade war first, and then how EMs compound that problem.
The big rout in emerging markets is starting to look like a full blown crisis. So far the US has proven itself immune to the turmoil, but the contagion is spreading, according to both JP Morgan and BlackRock. The pair say that a herd mentality has taken hold and that investors are indiscriminately selling emerging market assets, so matter what the value or long-term outlook. Even those with holdings that look strong are selling for fear of getting trampled by the rest of the herd, thus feeding the cycle further.
FINSUM: The big selloffs now include not only Argentina and Turkey, but South Africa, Brazil, and Indonesia. Given the Fed’s hawkishness and trade wars roaring, there is no end in sight for the turmoil.
A couple of weeks ago investors seemed ready to accept that the brief emerging markets selloff was just a minor Turkey-induced tantrum, but would not blossom into something worse. Well, that view seems to be waning, as the selloff in EMs has spread and is starting to have all the hallmarks of a full crisis. One analyst summarized the situation this way, explaining that this has all the hallmarks of an EM crisis: “a large dose of debt and an associated domestic credit bubble, including misallocation of capital into uneconomic trophy projects or financial speculation. Then add: a weak banking sector, budget deficits, current-account gaps, substantial short-term foreign-currency debt and inadequate forex reserves”.
FINSUM:EMs are facing a lot of headwinds, but the economies in most of them seem healthy, so hopefully the problems will be contained to just the most troubled (e.g. Turkey and Argentina).
Pimco, long-time leader in fixed income, has just gone on the record saying there may be some good opportunities in emerging markets. The company’s CIO sees the major turmoil in EMs, but says they offer opportunity. With all the selloffs, Pimco says “There are clearly a lot of challenges in emerging markets. But we see a little bit of value. It’s beginning to look interesting … We don’t see the same complacency in emerging markets as we do in other markets … We are more buyers than sellers”. For instance, Pimco is a major holder of Argentinian debt, and favors the country over Turkey.
FINSUM: With all the currency weakness and selloffs, there are certainly some good opportunities. However, this is an area where we may favor active management, as it takes a lot of work and insight to understand the internal dynamics of EM opportunities.
(Rio de Janeiro)
The outlook for emerging markets appears to be dimming. While Turkey’s troubles are well-know, widespread weakness in EM currencies is rattling the markets. EM equities are flirting with a bear market and metals prices have dropped sharply, with the latter hurting EM economies in particular. The worries over EM stocks are now seeping into Eurozone banks, where fears for lending losses are rising. One research analyst sums it up this way, saying “The combination of stronger currencies, lower commodity prices, and potentially weaker bank credit creation is a disinflationary headwind for developed markets in the near term”.
FINSUM: There are many factors which seem to be dragging emerging market economies downward, and that may be a bad sign for the global economy as a whole.
Most sources, including FINSUM, have been concluding that the emerging markets flare up centered on Turkey, would not develop into a correction or financial crisis for developed markets. Today that position is looking weaker, as stocks fell sharply across the world yesterday, and commodity markets got routed. Emerging market stock indices have fallen back into a bear market. While EMs fell big, global markets saw share plunges exacerbated by a dismal earnings report for one of China’s big tech companies, which then seeped into tech shares globally.
FINSUM: The narrative here is that Turkey sparked a big selloff and now fears over China will continue to drag EMs down. This could be the start of a global recession, but perhaps it will not be accompanied by huge losses in developed markets.