Emerging market stocks have borne the brunt of the global sell-off, with the MSCI Emerging Markets index losing 20% in sterling terms from its record highs of early May. Emerging currencies slid in tandem as investors sold out, although, as the FT’s Lex column points out, investors are now becoming more selective: currencies with expanding current account deficits such as the Turkish lira – now down 40% against the euro since February – have continued to slump, while the Brazilian real and the Korean won, underpinned by current account surpluses, have been more resilient.
For many observers, plentiful global liquidity and investors’ search for yield have boosted emerging markets, so tighter global monetary policy presages plenty more upheaval ahead, says Stephen Roach of Morgan Stanley. But bulls trumpet a buying opportunity amid the best fundamentals in a generation. Current account surpluses have reached over 4% of developing world GDP; debt has been reduced; foreign exchange reserves are piling up; and long-term foreign direct investment is replacing short-term capital inflows. So emerging countries look less vulnerable to a sudden outflow of foreign capital and a 1990s-style crisis.
This is all very well, according to Roach, but it’s a case of generals fighting the last war. “The proverbial next crisis is never like the last one.” The key threat now is the developing world’s enduring reliance on “US-centric external demand”. Emerging markets are still dependent on export-led growth; exports comprised 38% of developing world GDP last year, compared to 26% in the industrialised world. And most exports head to the US, which accounts for 40% of China’s exports, 80% of Mexico’s and 23% of Brazil’s. As far as the key source of external demand, US consumption, is concerned, “the stars are in especially tough alignment”. With consumers finally looking set to rein in their spending, it might not be long before externally dependent emerging economies hit trouble. So far, emerging market stocks “are only starting to get a whiff of such a possibility”.