Emerging markets meltdown unlikely to occur

Emerging markets are unlikely to be subject to a widespread crisis despite recent downturns in some areas, as investors are not selling out of the sector which still shows solid economic growth and recovery. 

The claims have been made by Standard Life Investments (SLI), which stated that while outflows had been occurring in the emerging market sector for the past three months, these outflows were small and investors were making the distinction between good and bad risks. 

SLI’s cautionary comments follow last week’s sharp falls in the currencies of seven emerging market nations, with Argentina devaluing its currency by 12 per cent and the Turkish lira and South African rand both falling by about 3 per cent. The Russian rouble, Mexican peso, Brazilian real and Korean won were also sold down. 

SLI said that despite these falls a wider collapse was unlikely as emerging markets “are simply in better shape than they were on the eve of the Asian crisis in 1997. Public finances are sounder, current account deficits are smaller, reserve coverage is higher and inflation is lower.” 

According to SLI, the sell-off was triggered by concerns the Chinese economy was slowing even further, along with the failure of the Turkish central bank to raise short-term interest rates and the civil unrest in the Ukraine. 

However it warned that the macro-factors which have driven emerging markets in recent years are beginning to reverse with the commencement of US Federal Reserve tapering, the rise of US interest rates and slow growth in Europe and Japan. 

SLI warned that emerging markets will remain risky but stated that - apart from rising global interest rates in the face of US Federal Reserve tightening and a hard landing for the Chinese economy - “any crises are likely to be limited to those countries like Argentina, Venezuela, Turkey and South Africa that are either unable or unwilling to put their houses in order”.