(B) Since last year, the headlines for emerging markets have not been very sunny to say the least. But there are starting for 2014 to be even worse. There is political chaos in Turkey, Ukraine, and Thailand that have been making the news every day for a few months already. There is a currency crisis in Argentina, Turkey, South Africa, and Russia. The Argentine peso had its steepest drop since the country’s economic depression of 1998-2002. Turkey, South Africa, India, Brazil, and Indonesia have all current-account deficits, which have left them vulnerable to capital outflows. And economic growth is slower particularly in Brazil, Russia, South Africa, and India.
As the US Fed is slowing its bond purchase program, US interest rates are going up, and US bonds are becoming cheaper which is triggering capital outflows from emerging countries to developed economies. Less capital for emerging markets means more expensive and slower economic growths for those countries.
At the same time, the economic growth in China, which is a large importer of goods and commodities from emerging markets, is slowing. Lack of exports for emerging markets could result potentially in tighten monetary and fiscal policies in those countries.
The long-term outlook for emerging markets is still very much positive as the economic gap between the developed and the developing world is shrinking due to the globalization of worldwide economies but the present short-term is very much troublesome.
For deeper dives on that subject:
- The Economist: Locus of Extremity
- Bloomberg: Emerging-Market Rout Seen Enduring on Low Real Rates
- The New York Times: Dark Side of Capital in Emerging Markets
- Forbes: Why Panic-Prone Emerging Markets are Breaking Down in 2014
Note: The picture above are the clouds that we are waiting to come to California to save us from the drought.
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