It is hardly surprising that global growth scares hit emerging markets more powerfully than developed markets. By the end of last week, share prices in developed markets had recovered most of their losses, while global emerging market equities were down 1.7 per cent and Asian markets, usually the most resilient, had dropped 0.9 per cent. Earlier in the week emerging market assets had reacted in a more contained way, but that “reflected the fact that they had already weakened meaningfully, so positioning was arguably lighter”, wrote analysts at Goldman Sachs.
Emerging market currencies have been ailing for a while and are down more than 5 per cent for the year. While emerging market investment-grade debt has held up better, it has done so because of slowing growth and more disinflationary and deflationary pressures.
There are structural as well as cyclical reasons to continue to be gloomy about emerging market prospects – particularly in Asia. At the same time, though, investors should adopt a more nuanced view. While emerging markets are not about to decouple from the rest of the world, the divergence in performance within that overly broad category may become more dramatic.