Falling emerging markets: do experts think it's time to buy?

Feb 7, 2014

It's been a bad start to 2014 as 'Fragile Five' spread contagion, and there could be more gloom to come

THIS is not how US and European equity markets were supposed to start 2014," says the FT. Emerging market turmoil has dashed "the new year optimism about a recovering global economy and the smooth unwinding of the US Fed stimulus". 

What started as a currency rout among the so-called "Fragile Five" (Turkey, Brazil, Indonesia, India and South Africa) has caused stock markets globally to swoon. Before the slight recovery rally later this week, the Dow Jones was down seven per cent, the FTSE 100 had has lost 3.5 per cent, and Japanese stocks had taken a ten per cent pummelling. For many, the contagion danger seemed obvious. "While US and European equities largely shrugged off the 1997 Asian market crisis, global links have since become much closer, increasing potential spillover effects."

Optimists believe that most emerging economies "are far less vulnerable than they were in 1997", says The Economist, but "the wild card is panic". Even if the fundamentals don't warrant large-scale flight, "currency crises can become self-fulfilling".

But the sell-off wasn't just about emerging markets, says Chris Marshall on Citywire. A dreadful set of US manufacturing figures fuelled fears that maybe the recovery there isn't as strong as we thought. And lurking in the background, as ever, is anxiety about a blow-up in China.

To round off the gloomy news, American politicians are preparing for yet another confrontation over the debt ceiling.

A correction of sorts was inevitable after the pre-Christmas high spirits, said John Stepek in Moneyweek. But given the authorities' fear of deflation, "I don't see this being allowed to carry on". Either the Fed will pause the taper, or the Bank of Japan will decide to print more money. "So stick to drip-feeding money into your chosen markets, and just enjoy the opportunity to buy more stocks for your cash." 

No-one doubts the potential of emerging markets, said Citywire's Chris Marshall, and there are doubtless bargains out there. "But it might be wise to wait a little longer, even at the risk of losing some early gains." As Eric Verleven of SGPB Hambros observes: "There might be a time ahead of us to buy, but at the moment we prefer not to catch a falling knife."

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