If you’ve been following global financial news, you’ll have noticed the increasing wave of emerging market crises that are spreading around the globe. From South Africa to Turkey, Argentina and Venezuela, emerging markets are facing a torrid time. Add Indonesia, Saudi Arabia and China to the list, and what started out as a currency crisis is increasingly looking like a major bear market for EM economies.
Weighed down by the growing threat of international trade wars between America and Canada, Mexico, China and Europe, these markets are plummeting fast. Alongside the stock market collapses, investors are facing an on-going currency collapse in the Turkish Lira, Mexican Peso, and South African Rand amongst others.
As interest rates in the UK and US rise, investors are selling off non-sterling and dollar-denominated assets to pile into these currencies. In 2008, the reverse happened when interest rates in developed economies plummeted during the recession, causing money to flow out of these economies and into developing economies in pursuit of higher returns.
Many emerging market economies are also facing severe headwinds, with astronomical debt levels, trade warfare, rising interest rates and falling growth.
Turkey, in particular, is facing a catastrophic collapse of its currency, collapsing more than 50% in value against the dollar this year alone. The country has a large budget deficit as well as one of the biggest trade deficits in the G20. It’s interest rates have spiralled as the central bank attempts to prop up its currency, but this has left households and business paying double digit interest on their debts.
Similarly, Argentina is facing astronomical inflation of more than 30% year-on-year and a similar collapse of its currency, falling to more than 40 pesos to the dollar in the last few days. Their central bank has also hiked their interest rates to 60%, but this doesn’t seem to be stabilising the currency, presumably due to the clear sense of panic which it conveys.
As a global investor, this wave of panic sweeping emerging markets is a little concerning and I’ll be keeping my eyes open for upticks on volatility or signs of more global contagion spreading across markets. Having said that, any portfolio that invests in well-run companies, is well diversified and properly managed should weather storms such as this reasonably well. If this is the beginning of the next global bear market, it will be an interesting test of my asset selection and risk management skills.