Are Emerging Markets losing their Sheen?

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Last few weeks in particular have been very exciting (and painful) for stock market participants across the Globe. With the outlook of U.S. and Europe Economies diminishing further, the focus seems to be shifting back to the Emerging Economies of the World. Analysts from big financial institutions have been voicing their opinion on how the World recovery will be led by robust growth in the Emerging Economies. In reality however, things are not looking good for Emerging Economies as well. High fiscal deficits, high inflation, lack of governance, slowing growth and reducing internal consumption are some of the main reasons which make Emerging Economies susceptible to prolonged period of correction – consolidation.

Historically, World markets have risen and fallen together. The global sentiment invariably effects the mood of individual stock markets in the World. With signs of U.S. and EU economies slowing down further, global investor confidence has taken a severe impact. There has been a move towards the U.S. Dollar and towards assets which are less risky. Emerging markets are also witnessing the impact of the same. China in particular will face short term impact on its Economy due to the fall in demand from the U.S. and EU, but overall the impact will be limited as China has enormous resources at its disposal. Furthermore, slowdown in Global economy would mean that Chinese inflation will come under control in coming quarters putting an end to interest rate tightening moves. Along with China, Indonesia seems to be in a good position as well. Indonesia is less dependent on exports, has limited linkages with Global economy and has witnessed strong FDI inflows this year. Furthermore, on account of inflation, performance of Indonesia has been superior when compared to its Asian peers.

On the other hand, countries like India, Brazil, Russia, Korea, Poland and Turkey are likely to witness more challenges in the near future. In India, inflation remains a serious concern and in its latest interaction, RBI (Reserve Bank of India) officials have clearly indicated their commitment towards fighting inflation (indicating more rate hikes which will directly impact growth). On governance front, the Government continues to remain ineffective and is more focused towards saving its own face amidst the corruption scandals and the face off  with the Civil society. Brazil is facing its own set of problems ranging from high inflation to rise in bad bank loans. Recently the Brazilian Central bank unexpectedly cut interest rates to 12 percent from 12.75 percent marking widespread concerns over the commitment of the central bank to fight inflation. Inflation in the country is running at 7.1% and remains a concern for many investors. Russia on the other hand remains vulnerable due to its fuel linked revenues which get directly impacted with a slowdown in Developed economies. Korea and Poland on the other hand face problems due to high external debts in the banking sector. Though the debt levels are not as high as they were in 2008, the impact on these economies due to a slowdown in Developed world will be significant. Turkey also faces significant pressure on its Economy as the current account deficit is nearly 10% of the GDP. In the wake of current global uncertainty, Turkey will find it extremely difficult to finance its deficit and this will put tremendous pressure on its currency and its Economy.

With Global Economies likely to struggle in future, the only solution at this stage is for U.S. and EU to fix their problems as soon as possible. If this is not the case, the other likelihood is for markets to correct the problems on their own. This would mean a widespread meltdown in asset prices which would automatically take care of the high inflation prices and external pressures on Emerging Economies; the engine for the next global Bull cycle. With political parties in EU and U.S. at loggerheads, and with Commodity prices being where they are, the likelihood of markets correcting the problem on their own remains very high. For the time being though, there is no hiding from the fact that within the current global scenario, Emerging Markets are likely to be impacted more in near future.