There is a long-running narrative about emerging markets, with which most of us are very familiar. They are faster growing, more dynamic economies than in the western world. Their fabled, rising middle class is going to fuel new consumption and the development of new brands. They are, in short, the future, and the time to invest is now. Yet, since February, emerging markets have run into a bit of a brick wall, and not for the first time in recent years. What gives?
The proximate cause for concern is emerging market currencies. This is usually a sign of other problems. The JP Morgan index of EM currencies, which surged in 2017, has given up nearly all its gains, dropping to its lowest level in a year. Hardest hit have been the Turkish lira and the Argentine peso.
In fact, if you are going to Turkey for your summer holidays, you’ll be overjoyed. Your pounds will go almost 20 per cent further than you might have imagined if you had booked in January, and almost 40 per cent further than a year ago. It’s all a bit volatile at the moment because yesterday the Turkish central bank raised a key interest rate from 13.5 to 16.5 per cent, doubtless to President Erdogan’s chagrin, and the lira rallied by 5 per cent. The Argentine peso has dropped by nearly a third against Sterling since the end of last year, and by 65 per cent compared with a year ago.
It is no coincidence that among major emerging markets, Turkey and Argentina are the two with balance of payments deficits of around 5 per cent of GDP. This sort of imbalance is usually associated with financing problems at some point, and foreign investors have indeed been questioning the credibility of—or given up on—the policies being pursued by both governments.
The wider financial outlook for emerging markets nowadays tilts on an axis with Chinese economic growth on one end and United States monetary policy on the other. During much of 2016-2017, benign conditions prevailed. Chinese economic growth became more reliable and buoyant following the financial problems in that country in the prior two years, while in the US, the Federal Reserve was gingerly raising interest rates with long intervals in between.
Yet, in the year to date, it’s been a case of change.
Chinese growth is…