Fears over Emerging Market Unsettle Investors

Many stock markets around the world have recorded sharp falls and the currencies of many emerging markets (EMs) weakened further on a mixture of concerns, including a potential slowdown in China’s economy and the likelihood that later this week the US Federal Reserve will announce a further tapering of its quantitative easing (QE) programme.

The decline was initially led by the Turkish lira (TL), weakening for the 11th straight session against the US dollar (USD) to a record low. The currency, which has failed to react to intervention by the Central Bank of the Republic of Turkey, fell by up to 2.3% but rallied after the Bank announced an extraordinary meeting for Tuesday, at which investors anticipate an interest rate rise will be announced.

The Bank’s previous efforts to bolster the currency but avoid a politically unpopular rate rise included plans last week to increase rates on ‘extraordinary days’ – of which Monday is the first – from 7.75% to 9% and an estimated US$3bn intervention in the market.

The South African rand (ZAR) weakened for a fourth consecutive session against the USD to hit its lowest level since October 2008, a month after Lehman Brothers collapsed. The Russian rouble (RUB) fell for a third consecutive session to its lowest level since early 2009 against the USD.

Investors have withdrawn money from EM stocks funds in six of the last seven weeks, with US$422m taken out over the week ended January 22, according to Lipper, a Thomson Reuters company.

The strategies being pursued by investors to limit losses or take advantage of the weakness include buying exchange-traded funds (ETFs) that have short exposure to Brazil and other Latin American countries, buying funds that invest in mid-cap companies seen as less vulnerable to global turmoil, and investing more in exporters in countries such as South Korea and Mexico. These are countries seen having better prospects among EMs and their exporters earn revenue in USD, reducing their exposure to volatility in local currencies.

“Countries with high current account deficits, political trouble and/or a growth model based largely on rising commodity prices are vulnerable,” said Holger Schmieding, chief economist at Berenberg Bank.

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