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Why emerging markets are facing an intense selling pressure

The market carnage has been the greatest in the emerging market (EM) currencies, pushing losses beyond the levels experienced during the global financial crisis in 2008.

, ET Bureau|
Aug 26, 2015, 08.21 AM IST
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The market carnage has been the greatest in the emerging market (EM) currencies, pushing losses beyond the levels experienced during the global financial crisis in 2008.
The market carnage has been the greatest in the emerging market (EM) currencies, pushing losses beyond the levels experienced during the global financial crisis in 2008.
The MSCI Emerging Market index, a widely tracked index by global fund managers to benchmark their investments in emerging markets, has dropped to the lowest level since July 2009. The market carnage has been the greatest in the emerging market (EM) currencies, pushing losses beyond the levels experienced during the global financial crisis in 2008.

The ET Intelligence Group explains why EMs are facing an intense selling pressure...

What is different this time?

Upheavals largely in the developed countries such as the 2008 financial crisis, the monetary easing policy by the US Federal Reserve, and the Greek crisis impacted global markets over the past few years. Now, after a long time, EMs have triggered a crash in global equities. The slowdown in the China appears to be worse than feared.

Are developed markets a safe-haven?

Not exactly. A lower global growth is affecting the US corporate earnings. Investors, in fact, have started selling the stocks which were considered the biggest winners of 2015. US firms known as the Fab Five — Netflix, Facebook, Amazon, Google and Apple — have together witnessed a whopping $97-billion erosion in the market value over the last two days.

What has triggered selling in the EMs?

Falling commodity prices and the fears of probable impact from the US Fed’s decision to hike interest rates are major headwinds for EMs. The surprise Yuan devaluation hints at a possibility of another round of currency war among the emerging markets to help their exporters. Last week, the central bank of Kazakhstan and that of Vietnam followed the suit.

Are EMs across the world at risk?

EMs with significant exposure to China, in terms of import or export, are at a higher risk. Assets of commodity exporters such as Brazil, South Africa and Kazakhstan are witnessing selling pressure. Assets of countries having lower exposure to China such as India, Poland and Hungary are faring relatively better.

How long could turbulence last?

In the near-term, if the US Fed decides not to hike interest rates in its upcoming meeting on September 17 and if Yuan is not devalued further, markets may show some stability.

How will Indian equities be affected by selling in EMs?

Indian equity market and currency have been relatively stable due to falling crude oil prices, lower dollar debt and lower exposure to Chinese economy. But, there could be selling pressure since some of the foreign portfolios are designed to unwind in times of turmoil and heightened volatility. Also, redemption pressure on global fund managers may aggravate the selling in fairly liquid markets such as India where they are in profit. India has been one of the best performers this year. However, if some other EMs start showing promise, money could shift.
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