Emerging countries are trying to change course but are unable to find their way up. In the last month, the Msci EM index lost 16,6%, bringing the year-to-date performance to -11% (data in euro as at 25 August). The flight of investors is partly explained by the worsening of global growth prospects (which has convinced investors to move away from assets considered riskier) but, also, by the forthcoming rise in US rates which is pushing operators to focus on financial assets denominated in dollars.
Chaos China
To complicate things for the entire segment, China has also started. The government of the Asian country intervened on the stock exchange after sales on local lists, between mid-June and early July, had burned 30% of their value. The authorities have reacted with a series of measures aimed at stabilizing the market, including cuts in interest rates and compulsory reserve ratios, the suspension of IPOs (which reduce market liquidity), a ban on major shareholders from selling their investments for six months, imposing restrictions on short selling and encouraging banks, brokerage firms, insurance companies and pension funds to buy shares. The interventions were not appreciated by the markets which interpreted the plan as an attempt by the state to condition stock market prices. Operators' sentiment did not improve when the People's Bank of China decided to devalue the yuan, causing a small earthquake on the global markets which once again began to question the stability of the first emerging economy and of the entire world economy.
Common problems
It must be said that the problems that emerging markets are facing now do not end with the Land of the Dragon. “The slowdown in global trade is forcing developing economies to rethink their growth model,” explains a study by Alex Wolf, economist at Standard Life Investments. “Emerging countries, especially those whose growth models rely on exports, have to adapt to weak external demand, low commodity prices and China's rebalancing. As a result, exports were very weak in the first part of the year, mainly due to low material prices and a stronger dollar, although excluding these two factors, it is still clear that it is the weakness in external demand that affects more".
Data from the World Trade Monitor show that trade volumes in emerging countries have declined significantly compared to the first part of the year and data on individual countries show that exports remained weak in the second quarter. “Weakness in Chinese domestic demand plays a part. Korean exports decreased by 6,8% in the second quarter compared to 2,9% in the first, while exports to Taiwan fell by 9,8% compared to 4,1% in the first quarter”, explains the study by Wolf. "That said, exports recovered slightly in June, with the strongest data from China, Korea, Vietnam and Brazil suggesting a strengthening US economy and a recovery in Europe."
