The
sell-off in emerging markets shows no signs of abating. Last Thursday,
Argentina, one of the most vulnerable developing economies, was forced to raise its main
interest rate to 60 per cent in a desperate attempt to arrest the plunge in its currency, the world’s worst-performing this year. The wilting
Turkish lira, meanwhile, fell almost 9 per cent last week.
Both countries’ woes are contributing to the strain on other emerging market
currencies which, according to a new report from Ashmore, an asset manager, have entered their most volatile phase since the
global financial crisis.
Investor sentiment towards developing economies was also undermined by reports that US President
Donald Trump wants to move ahead with plans to impose tariffs on an additional
US$200 billion of Chinese imports, further escalating a
trade war that threatens to depress global growth.
Add in the sharp rise in the US dollar since April, stemming mainly from the more hawkish policies of the
Federal Reserve, and steep falls in industrial metals prices over the past several months, and the scope for further outflows from emerging market funds is considerable.
The selling pressure is fiercest in equity markets, mainly because of the heavy weighting of
China in the benchmark
MSCI Emerging Markets Index. Not only does the world’s second-largest economy account for 31 per cent of the gauge, Chinese companies make up nearly
45 per cent of the popular information
technology subindex, which itself has a more than 27 per cent weighting in the broader index.
The 12.1 per cent drop in US dollar terms in the China component of the index over the past three months – a decline more or less on a par with the fall in the CSI 300, a leading gauge of mainland stocks – has been the key factor behind the nearly 6 per cent decline in the broader gauge. If China is excluded, emerging market shares have fallen only 2.6 per cent since the end of May, just before the trade dispute escalated sharply and the yuan began its steep decline against the dollar.
