Here we go again... or not? Emerging Markets are a bit different this time

The virus affecting Emerging Markets is spreading this week.  Like most previous occasions (1982, 1997, 2008 et al) the transmission method is currency weakness.  Historically, the causes have been largely to do with economic mismanagement in the EMs.  This time, with a few exceptions such as Turkey and Argentina, the problem appears to be dollar strength.  It is still hurting EMs as much but it may well not lead to the same cathartic volatility in global markets as previously.

 

Why do we say that?  First, we do not believe the Chinese economy, so important to EMs, is about to implode.  The PBoC is still providing plenty of liquidity, and China is embarking on major fiscal initiatives such as its Belt and Road initiative.  Readers may argue about the longer term prospects for a controlled economy but we’d suggest that in the short to medium term there’s no reason to expect it to derail.

 

If you look at EMs excluding China, four key measures of financial health all look robust by historical standards.  These are current account surpluses, net inward Foreign Direct Investment, the level of forex reserves and the volatility of financial inflows.  Data comes from our friends at CrossBorder Capital Ltd and is available from us on request.

 

That’s not to say there may not be further drops in markets, both EM and DM, over the next few weeks and months, but our point is that China is still on track and most other EMs are in reasonable financial health.   We’d argue that there is a buying opportunity coming up in them.