Emerging markets crisis: Just days after Paul Krugman joined the growing contingent of economists and top market voices including Mark Mobius warning of a meltdown in emerging markets, CLSA’s Chris Wood said that the space is vulnerable on a strong dollar. In his latest Greed and Fear report, Chris Wood, Equity Strategist, CLSA noted, “What is clear is that a further sharp rally in the dollar from here will be a negative for risky assets everywhere, and not just emerging markets, though emerging markets will likely take the strain in the first instance.”
Notably, nobel laureate Paul Krugman said the current episode bears some resemblance to the Asian financial crisis in the late 1990s, when developing-nation stocks slid 59 percent and governments raised interest rates to exceptionally high levels. “It’s become at least possible to envision a classic 1997-8 style self-reinforcing crisis: emerging market currency falls, causing corporate debt to blow up, causing stress on the economy, causing further fall in the currency,” Paul Krugman Tweeted. In fact, a dozen emerging-market currencies have fallen more since February than they did during the 2013 taper tantrum, according to a recent Bloomberg report.
Even the normally bullish emerging markets champion Mark Mobius said there’s worse to come for emerging markets. According to the expert, there’s a danger of contagion from the deteriorating situation in Turkey, and Argentina and Brazil aren’t doing well. “We still could have some downside in the emerging markets. “But selectively, you have some good opportunities. Now would be a stock picker’s market,” he told Bloomberg.
The MSCI Emerging Markets Index of shares has fallen around 11 percent from a 10-year high in late January as rising Treasury yields and the dollar sapped demand for riskier assets, a recent Bloomberg report said.
While the forecast situation appears to be grim, Paul Krugman does not see a full-blown financial crisis. “Are we seeing the start of another global financial crisis? Probably not — but I’ve been saying that there was no hint of such a crisis on the horizon, and I can’t say that anymore,” he said.