Macroscope | Emerging markets still have upside amid the downturn

In the aftermath of the global financial crisis, the “decoupling” thesis was popular among some investment strategists as the economies and financial markets of many large developing nations, notably China, performed better than those of advanced economies, having proved more resilient to external shocks than previously assumed.

The decoupling theme was, in truth, overhyped and misleading. The steep declines in asset prices in developing economies during the so-called taper tantrum in 2013 revealed the degree to which emerging markets are influenced by financial and economic trends in advanced economies.

The surge in volatility in the stocks of developing economies since a bout of turbulence swept through global markets at the end of January is the latest sign that the fortunes of emerging markets remain closely tied to those of developed countries. While the benchmark S&P 500 index has dropped more than 8 per cent from its peak on January 26, the MSCI Emerging Markets Index, a leading gauge of stocks in developing nations, has fallen by roughly the same amount. What is more, emerging-market shares have been almost as volatile as the S&P 500, plunging in early February, only to rebound sharply throughout the remainder of the month. 

Last month, developing countries’ stocks came under renewed pressure because of the turmoil in the popular technology sector which has suffered due to mounting concerns about data privacy and the threat of greater regulation.