Emerging markets are in free fall with currencies stumbling, stocks tanking, and commodities plunging. Investors are having flashbacks to the financial crisis in Asia during 1997 and 1998 as a result. The widespread concern over a slowdown in China has dented confidence around the globe. Despite the panic though, Morgan Stanley has released eight reasons why it believes the latest emerging market turbulence is not as bad as the episode in the late 90’s.
First and foremost, Morgan Stanley argues that a, “large part of the debt buildup in this cycle has been in domestic rather than external debt. Moreover, the limited buildup of external debt has been denominated in local currency and raised by the public sector. In contrast, the external debt buildup during the 1990s cycle was denominated largely in U.S. dollars and was raised by corporate sector.”
Secondly, Morgan Stanley states that the region is “suffering from low-flation in CPI (consumer price index) and persistent deflation in PPI (producer price inflation).” Normally inflationary problems are a constraint to central banks’ response but that has not been the case in this new cycle. Additionally, the current account is largely in surplus. The only emerging markets with any deficit are India and Indonesia, with a small deficit under 2.5% of GDP.
Foreign exchange cover of short-term debt is higher, “at three-to-five times.” Import cover is also higher at around 15 months of imports. There is also a flexible exchange rate. The region’s currencies have already been adjusting in the last few years, which ensures a steadier adjustment pace. Though REER (real effective exchange rate) has been appreciating, “Morgan Stanley believes that for most countries, the REER has been transitioning from being undervalued to fairly valued as reflected in the current account balances.”
Additionally, the external triggers are significantly different this time around. “The pace and magnitude of the rise in real interested rates in the US is likely to be slower/lower, considering that potential growth rate in the US is now lower than in the 1990s.” The climate is also significantly different in Europe this cycle. In 1996 and 1997, Europe was tightening monetary policy. Today, Europe has been, “pursuing quantitative easing, keeping real interest rates in negative territory.”
Asia ex-Japan’s role has also changed since the late 90s. “In 1996, a year before the shock, Asia ex-Japan (AxJ) GDP was 9.8 percent of global nominal dollar GDP vs. the current share of 21.8 percent. In 2014, AxJ’s nominal GDP now is larger than the euro area’s, but still smaller than U.S. In this context, the feedback from Asia’s slowdown will affect developed markets as well, challenging the pace of U.S. monetary tightening.
The stumbling emerging markets have made this summer a stressful one for some investors. That does not mean market jitters should dictate your portfolio though! If you are curious or concerned about how these markets could affect you and your personal wealth, feel free to call an advisor at Apex Financial Advisors today. We can help you look at your wealth within the “big picture” to plan for your family’s future today.