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
One thing emerging-market fund managers will be grateful for at the moment is index provider MSCI’s decision not to include domestic Chinese shares in the overall index, reckoned Josh Noble in the Financial Times. That would have made things look even worse. As it is, the asset class is facing “the closest thing in years to a perfect storm”.
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.