In the never-ending desire for an increased rate of return, investors will follow the money trail around the globe to catch the rising stars before they nova out. The celestial reference may be more of a supernova perhaps, as there is nowhere left to hide for these nations whose currency is falling, inflation is rising, and GDP is in levels of recession.
Each successive day brings new news of a troubled emerging market world. That is the way it works. Once a rock has been turned over, investors will take a closer look at each pebble that has come free. It is the outside scrutiny looking in that is unleashing this news of trouble. Not the other way around. Today is no exception. MSCI Inc.’s index of currencies dropped for a fifth time in six days, the lowest close in more than a year.
While the list is quite exhaustive, let’s take a look at some of the key players in the emerging market contagion. You can’t tell a contagion without a scorecard.
South Africa: This nation has trouble from A to Z. The rand led global declines as data showed the economy fell into a recession last quarter. Its first recession since 2009, deepening investor’s worries over the prospects for emerging markets. With an unemployment rate at 27 percent and rising fuel prices, consumers are feeling the pain. The political violence is falling upon deaf ears. The party is debating a constitutional amendment to allow expropriation without compensation in some circumstances, in order to tackle post-apartheid inequality, stated President Cyril Ramaphosa. That is “think speak” for take from white landowners, give to black. This country is a mess.
Turkey: The great economist and President Erdoğan is one of the co-stars of this contagion production. First interest rates down, now interest rates up, the falling lira is bringing little comfort to EM investors. Turkish bonds rallied, while the lira retreated, after Monday’s vow by the central bank to reshape its monetary policy stance. Turkey’s central bank will meet next week. Most believe the results of which will not appeal to investors.
Argentina: Argentina is the other contagion co-star up for the academy award of economic grief. The Argentinian peso slumped to a record low against the dollar again today, acting as a proxy on the market’s lack of belief the nation can recover. The silver lining playbook for Argentina, like Italy, is the IMF. Talks are underway as we speak of getting early access to a $50 billion line of credit. This perhaps will appease investors in the short term, and could possibly signal a halt in the EM slide.
Other names such as Italy, Greece, and Saudi Arabia are still much in play. Contagion risks from Argentina and Turkey are growing for other emerging markets and economies with weak fundamentals such as those with current-account deficits and high inflation rates. Currencies of countries such as Indonesia, India, and Brazil have been among the most vulnerable. The Fed’s rate increases and trade frictions mean the underlying pressure on emerging currencies is for a further downward move.
While far from an emerging market, the second largest economy in the world, China, is also a player in this dilemma. Debt issues and slow GDP growth along with President Trump’s threat to ramp up tariffs on as much as $200 billion in additional Chinese products as soon as Thursday. The world is a busy place right now. Keep your head on a swivel and be constantly vigilant.