A trouble shared is a trouble halved, or so the saying goes. But the troubles are piling up quickly for emerging markets.
Jitters
about China, the meltdown in the Turkish lira, violent protests in
Ukraine and the plummeting Argentine peso—underlaid with continuing
nerves about the withdrawal of U.S. monetary stimulus—have all combined
to hit risk appetite. The problems aren't particularly new and don't
have much in common, but the combination is proving toxic.
The
biggest repercussions have been in the foreign-exchange markets, where
even currencies of countries with relative fundamental strengths, such
as the Polish zloty and the Mexican peso, have started to show signs of
strain. Pressures have also emerged in asset classes that have so far
remained resilient, such as U.S.-dollar-denominated emerging-market
bonds. That will understandably make investors nervous.
But
some of the concerns may ease. China is seeking to shift from an
economy led by investment to one driven by consumption. This is such a
vast and complex process that worries about how it is progressing will
be with us for a long time yet. The small dip in China's manufacturing purchasing managers index that some cite as a key reason for the market turmoil seems just a pretext.
Ukraine
and Argentina both look worrying, but their impact on global financial
markets should be limited. If other Latin American or Eastern European
currencies get hit, but are supported by relatively strong economies,
that could make them look good value in time.
Turkey
bears watching closely. The solution to the continuing selloff in the
Turkish lira—which Friday hit a fresh record low of 2.33 to the
dollar—seems clear: the Central Bank of Turkey needs to raise interest
rates. But political turmoil means it is unwilling to do so; its
interventions in support of the lira are inadequate in the meantime.
This
could cause larger problems. Turkish companies have large foreign-debt
exposures, and the lira's slide could cause balance-sheet strains. That
suggests that the central bank will ultimately have to hike rates to
avoid a bigger crisis. But the situation could get much more
uncomfortable before that happens.
Meanwhile,
the risk aversion in developed markets smacks of using the situation to
exit some very popular and profitable bets. Southern European
government bonds and stocks, hybrid securities that blend features of
equity and debt and subordinated bank bonds have all had a strong start
to the year; but they are also volatile. No wonder investors might take
the chance to step back.
Read more: Heard on the Street: Emerging Mix Rattles Nervous Markets - WSJ.com
