How This Emerging Market Selloff is Different

A recent article in The Wall Street Journal addresses the current selloff in emerging markets stocks and how it differs from past routs.

“The deepening selloff in emerging markets this year,” the article reports, “is one of the biggest of the past decade—and differs in ways that highlight how the developing world has changed.” The current environment, it says, was triggered by rising interest rates and trade tensions along with other shifts, including the emergence of asset managers as lenders to these countries (upending banks as the dominant lenders). “That is important,” it says, “because it spreads the risks across lenders and funds. It could also herald wilder market swings, given investors can withdraw their money compared with what banks can do with loans.”

With respect to returns, the article says, this year is among the most severe episodes of the past decade, with another difference being that this time around a small percentage of countries are bearing the brunt of the selling (specifically, Turkey, Argentina and Venezuela). Emerging economies are also relying less on foreign money compared with ten years ago, the article notes, citing data from the Institute of International Finance showing that in 2017, overseas capital flows to emerging markets equaled 4.35% of gross domestic product compared with nearly 9% in 2007.

The article concludes that these shifts mean that “losses from rising defaults in emerging markets will be shared by asset managers and the banking system. That reduces the chances of a systemic crisis but could hurt pension pots. Also, bank loans tend to be longer term, while funds can usually move in and out of investments quickly potentially leading to greater volatility.”