Market analysts and economic experts have for several months warned of the bottom dropping from emerging markets.
And with the world’s second largest economy, China, looking uncertain at the moment, there is a fear that a decade of positive growth in Asia, Latin America and Africa could be gradually overwritten in the short term as capital outflow surges.
On Thursday, China’s benchmark indices continued their week-long slide pummeled by the August 11 devaluation of the yuan and overall prospects that there was a slowdown.
The fall in Chinese stocks in Shanghai and Hong Kong pulled US stocks down and appeared to dampen expectations of the US Federal Reserve increasing interest rates in September.
In London, the FTSE fell to its lowest level in seven months.
Meanwhile, EPFR Global, a US-based firm that tracks the flows and allocations of funds domiciled globally, had alarm bells ringing when it found that emerging markets between January 1 and February 1 of 2014 had suffered an outflow of $12.2 billion in equity.
But by the end of the second quarter in 2015, outflow was increasing.
Between June 3 and June 10, outflow from emerging economies reached $9.3 billion – most of it from Asia. This was the highest outflow total in seven years.
Now, the Financial Times is reporting that the outflow may have reached as high as $1 trillion in just the past 13 months.
The figure represents a remarkable reversal of fortune.
Just over two years ago, the International Monetary Fund (IMF) predicted that “emerging economies persist in leading global growth in 2013”.
While the IMF painted a “mixed picture in advanced economies, emerging market countries are doing well,” it said in its April World Economic Outlook report in 2013.
But by 2014, the US had terminated its quantitative easing stimulus program – which had since 2009 injected extra cash into the markets thereby allowing investors opportunity to go overseas.
Foreign direct investments started to flow back into the US, and the values of emerging market currencies started to slowly fall.
Latin American currencies, such as the Brazilian Real and the Venezuelan Bolivar, have been hitting the lowest valuation in decades. From Argentina to Mexico, currencies have been breaking record lows week after week.
Analysts blame the strengthening of the US dollar, and the downward revision of growth in Latin American economies, which are largely due to currency devaluation, failing fiscal policies and downward revised investment ratings.
There are other factors which have contributed to the deluge of bad economic news and created the perfect storm of poor performance.
These include inflation (rampant in Brazil), the rapidly falling global appetite for commodities (copper and other metals, for example), falling oil prices (which impact exporters such as Indonesia, Russia and Venezuela) and the the stalling of the Chinese economy – and the waning of its appetite for importing goods.
With the weakening of the euro – some 21 per cent since July last year – investment has been shifting back to Europe.
These factors contributed to a selloff in emerging market currencies, stocks and bonds and a flight to the dollar.
But the greatest volatility in emerging markets is partially as a result of Beijing’s sudden devaluation of its yuan (RMB) currency last week.
The drop of three per cent has since adversely affected investors in China and shaken overall confidence whether Beijing’s move was a sign of the country’s worse-than-predicted economic outlook.
The People’s Bank of China insists this was a one-off devaluation.
In the interim, investors are very concerned that China’s shrinking demand for commodities coupled with a likely Fed rate increase will cut into growth prospects in emerging markets.
The IMF has cut emerging market growth from a decent five per cent in 2013 to 4.2 per cent in 2015.
By Firas Al-Atraqchi for the BRICS Post with inputs from Agencies