Keep Calm And Carry On

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What's going on?

Investors continued to sell off assets in emerging markets (EMs) on Wednesday, as fears from issues in South Africa, Turkey and Argentina spread to other countries (tweet this).

What does this mean?

Some emerging market countries caught cooties from others. Probably due to a phenomenon known as “contagion”, investors have been throwing the baby out with the bathwater by grouping EMs together. So some markets – where everything seems to be ticking along a-okay – end up suffering the negative consequences of other markets that are doing poorly.

The biggest emerging market of all, China, is hurting from the cumulative effects of contagion and a trade war with the US (which, in turn, may contribute to more contagion in other countries). The possibility of a fresh set of taxes (a.k.a. tariffs) on $200 billion of Chinese goods is on the horizon this week.

Why should I care?

For markets: Anybody got a vaccine?

EM currencies and stocks were both sold off as investors took their cash elsewhere – potentially to the US. After almost a decade of stagnant interest rates, hikes have returned (with two more forecast later in the year). This helps make US investments more attractive, pushing the value of the dollar up. A stronger dollar combined with weaker EM currencies (like the Turkish lira, Argentine peso, or South African rand) means more expensive dollar debt for those countries (without the amount actually increasing) – and they typically have a lot of debt. EM currencies losing value make imports more expensive, too, which hurts those economies even more. It’s a vicious cycle.

The bigger picture: Some light in the tunnel.

It’s not all doom and gloom. India’s economy grew by 8% in the second quarter – the most in over two years – but its currency is plummeting. The country imports around 70% of its energy needs and, with a weakening currency and strengthening oil prices, India’s vulnerable – though investors are hanging in there and the country’s doing okay at the moment.

Originally posted as part of the Finimize daily email.

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