The economic and economic-policy weakness in some emerging markets has now been persisting since the late spring. In recent weeks the overall picture has grown more strained still. There are, on the one hand, clearly delimited regional causes and trajectories, but on the other hand also supraregional factors at work that are currently shaping the development.
If you single out the two currently most prominent country examples of the turbulence in emerging markets, Argentina and Turkey, then at first the regionally confined, largely home-made problems dominate. In Argentina one would have to point to an economic policy that has (once again) failed for many years and that (this too is nothing new in Argentina) has relied heavily on foreign debt. At the same time, it has not succeeded in creating sufficient confidence among the population, and among international investors, in the country's economic policy. As a result, investment fell short of what was needed, and inflation could not be brought lastingly under control.
The situation in Turkey looks similarly awkward, additionally aggravated by an overall economic expansion built far too heavily on debt, and not only towards foreign lenders. This now rests on shaky foundations. On top of that, the central bank under Erdogan's Turkey can hardly still act independently, which represents a further setback for the future sustainability of the country's economic policy and also deters foreign investors.
But it is not only home-made problems. On top of these come overarching geopolitical factors, especially in the case of Turkey. The US has not only allowed the trade dispute with China to escalate further, thereby increasing still more the uncertainty about the future prospects of world trade and hence the export opportunities of the emerging markets as a whole. In addition, on account of political disagreements, the US has imposed an embargo on Turkey. This has forced the already pressured Turkish currency drastically to its knees, which in turn drives up the country's foreign debt (in US dollars). At the same time, interest rates in the US keep rising and lure capital away from the emerging markets. A vicious circle, and not only for Turkey.
Other emerging markets are affected too. Because of the US trade dispute, this applies above all to the emerging-market heavyweight China. The government has already pledged possible support measures for domestic exporters, in case the dispute should escalate further. Even so, noticeably negative effects are likely to arise nonetheless.
South Africa, meanwhile, has slid into recession. As a large economy, India alone has so far been able to largely steer clear of the turbulence (leaving aside the weak development of the external value of the rupee). In 2018, India is likely to take over from China the baton of the highest growth among the world's large economies, with GDP expected to rise by 7 to 7.5%.
The turbulence currently to be observed in emerging markets is therefore neither a flash in the pan nor a wildfire. The challenges are considerable and are not confined to individual countries. The causes and possible countermeasures, however, are very heterogeneous, which argues against a uniform, wildfire-like and already escalated general crisis situation across the emerging markets.
The still intact positive growth prospects for the world economy as a whole also argue against a wildfire. Beyond that, the long-term-oriented investor in particular must not lose sight of the following: despite all the wrangling, long-term growth prospects have barely dimmed to any notable degree in recent weeks. The Asian emerging-market economies in particular are likely to remain the engine of the world economy in the future too.
The takeaway for your investments
As so often with investing, neither panic nor complacency is called for right now when it comes to the emerging markets. A well-proportioned share of emerging markets in the portfolio remains absolutely advisable, especially for long-term-oriented investors, despite the currently unfavourable news situation. Whether clear buying levels are already in place again in equities and, above all, in bonds cannot, in the nature of things, be said with certainty. For the moment, however, there is quite a lot to suggest that the trouble spots will keep smouldering for some time yet and are more likely to continue holding prices back. Even if we are still not dealing with a wildfire.
Author: Philipp Dobbert, Chief Economist and Deputy Head of Asset Management, quirion AG
