The state of the global economy and global risk appetite are crucial influences on emerging-market stocks. So it’s hardly good news for the asset class that the outlook for the world economy is deteriorating. Slow recoveries in America and Japan, along with China and Europe’s downturns, have lowered global growth forecasts.
Eastern Europe looks set to struggle most as it is “next door to a giant currency bloc sliding towards recession”, says Clare Connaghan in The Wall Street Journal. The eurozone shrank in the second quarter and is expected to have contracted further in the third. Close trade links are one problem: in Slovakia, Hungary and the Czech Republic, exports to the eurozone account for around 45% of GDP. Hungary and the Czech Republic are already in recession.
Then there are the banks. The downturn and credit squeeze in western Europe has prompted eurozone banks to trim their exposure to subsidiaries, crimping credit availability in eastern Europe. Only Poland, which has a large domestic market, is sheltered to some extent from the downturn in the eurozone; lower interest rates there could temper the slowdown. It’s no wonder, then, that as the buzz from quantitative easing wears off, eastern European currencies and equities have already started to falter.