Current emerging market jitters are a little bit reminiscent of the financial crisis and loss of confidence that hit Asia in the late 1990s.
The trigger this time seems to be US efforts to wind down quantitative easing (‘QE’), suggesting an end to an era of cheap money that has benefited emerging markets around the world. There’s a general sell-off of emerging market countries’ currencies taking place (as well as stock market falls) and, if it continues, the relatively stable outlook for the global economy this year could be threatened.
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Earlier this month, international financial institutions were voicing cautious optimism on prospects for the world’s economy. However, the IMF noted that there are risks to the global economy arising from financial market turbulence and the volatility of capital flows. The World Bank also said that global growth prospects remain vulnerable to the impact of the withdrawal of economic stimulus measures in the US.
The latest gyrations in the world’s money markets are something to keep an eye on. The auto industry is heavily dependent on revenues and profits in emerging markets. At the moment a batch of countries appears to be particularly vulnerable, China not really impacted. China, remember, has built up vast reserves of cash and has an economy being shifted towards domestic consumption. That bodes well for its ability to act as a stabilising force in global terms.
Will the current loss of confidence worsen into a full-blown financial and economic crisis or fizzle out? Much depends on how the Fed reacts to the latest developments in terms of the QE winding down and whether markets can be calmed. We also need to hope that another global banking crisis, this time centred on an explosion of credit in emerging markets, is not about to upset everything.
January 2014 management briefing: world markets (1)
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