Equity Sell-Offs and Deteriorating Investor Sentiments across Emerging Markets

CEIC WorldTrend Data Talk - April 11, 2014 - In recent years Emerging Market Economies (EMEs) have been considered the saving grace for the global economy. In 2009, when the combined real gross domestic product (GDP) of EMEs grew by 3.09%, advanced economies' GDP declined by 3.43% in real terms. During that period EMEs attracted immense capital inflows from an international capital market abundant with liquidity and seeking high, but riskier returns. Since mid-December 2013, when the US Federal Reserve (the Fed) trimmed its quantitative easing (QE) programme, a wave of capital flight from EMEs has been observed. Besides the monetary tapering in the US, the evaporating investor confidence in most EMEs has been exacerbated by the slowdown of the Chinese economy and declining commodity prices (which are in large part interlinked). The countries most vulnerable to such capital outflows have been those with weak macroeconomic fundamentals and/or turbulent political environments. Economies with persistently high budget and current account deficits and/or declining terms of trade, such as Brazil, India, Indonesia, South Africa and Turkey fall into that category. Along with the considerable foreign capital withdrawals, in the past few months various EMEs across the globe have experienced another wave of adjustment, resulting in currency depreciation, considerable uplift in government bond yields (the cost of borrowing) and a substantial sell-off of equities. During 2013, the dynamics of the money and capital markets in EMEs was mainly driven by the news of the potential tapering of the Fed's monthly bond purchases. In September, when the financial markets anticipated the tapering, the decision of the Fed to keep its QE programme intact had a positive effect on financial markets across the EMEs. The MSCI Emerging Market Index, which measures the stock market performance in 21 developing economies, rose by 6.23% in September 2013 on a month-on-month basis, and by another 4.76% in October. Nonetheless, the index then started to decline amid strong US economic performance raising expectations of a slowdown in asset purchases that was confirmed on December 18, 2013. Thus, the index declined for three consecutive months, losing 9.46% between November 2013 and January 2014. The Fed's decision had major spillover effects across the EME's equity markets. Moreover, market pressure escalated on January 23, 2014, when Argentina's central bank scaled back support for the peso, which immediately lost 10% of its value vis--vis the US dollar. This event led to sharp, synchronised depreciations of a number of other emerging market currencies, such as the Turkish Lira and the South African Rand. The plunge on the currency front exacerbated the free fall on the equity markets. Although stock market performance across various EMEs in Asia and Latin America improved in the second half of March 2014, as of 26th of the month the MSCI indices for these regions have lost 1.85% and 4.03%, respectively, since the announcement of the tapering. The situation in Emerging Europe was even worse, and with the Crimean crisis also weighing on the markets the index lost 9.71%. By contrast, the MSCI World Index, measuring the performance of 23 developed economies, registered a cumulative return of 2.52% for the same period. The deteriorating investment environment is confirmed by the monthly Sentix Economic Indicator, which represents financial market participants' assessment of the present economic situation and their expectations for the next six months. In the first quarter of 2014 investor sentiment in the EMEs was predominantly negative. The composite overall index for Asia ex Japan saw a sharp decline in the beginning of the year to reach 13.86 points by the end of February, or about 50% below the level registered in December 2013. Investor perceptions for Latin America were similar to those for Asia, and in February the overall Sentix index for Latin America plunged to its lowest level since mid-2009, reaching -5.87 points. However, the negative trend was followed by a marked increase in March to 15.98 points in Asia ex Japan and -1.85 points in Latin America, which somewhat softened the slump. However, EMEs may enjoy some positive spinoff effects in the coming months, as Euro Area Sentix Economic Indicators started exhibiting some optimism in February and March 2014, for the first time since August 2011. By Kamen Parushev Google+ Author Profile - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
11th April 2014 Equity Sell-Offs and Deteriorating Investor Sentiments across Emerging Markets

Explore our Data