All eyes are on Asia right now, what with the gut-wrenching drop in the Nikkei and the continued slowdown in China.
But the global growth story — or should I say struggle — is much more than what’s going on in these big players, or even in the U.S. and Europe. It’s about emerging markets, and how many regions that should be high-growth are turning into slow-growth … or even no-growth.
Here are just some of the ugly items investors have had to deal with:
- Thailand saw its stock market fall more than 5% in a day this week as foreign cash fled.
- The Philippines’ stocks crashed 7% recently, too.
- Turkey’s stocks have been cratering in the wake of recent protests.
- Brazilian stocks hit a 20-month low last week as ratings agency Standard & Poor’s warned about the nation’s sovereign debt.
- Thanks to trouble in these regions — and of course China, Europe and the lot of ’em — the World Bank just cut its global growth estimate.
So what’s the reason for this emerging-market rout, and what does it mean for investors? The biggest reason for the declines, in a nutshell, is currency volatility.
U.S. interest rates on Treasuries have actually pushed into decent territory, with the yield on the 10-year touching 2.29% recently — its highest level in over a year. That, coupled with posturing by the Fed that implies tighter monetary policy in the next year or two, means a stronger dollar.
Money is flowing into the U.S. as a result — because hey, in this challenging environment, a yield of that size looks decent. And where is that money coming from? From any number of places that seemed like a better alternative several months ago. Thailand. The Philippines. Turkey.
In other words, the struggles in the U.S. and the low-interest-rate environment pushed cash abroad. But now that cash is coming back home, and emerging markets are feeling the pain as a result.
Bake in the China slowdown that is dragging down commodities because of lower demand, and you have a recipe for EM disaster. Emerging markets obviously lack high-tech or consumer-driven economies, and make a lot of their cash in industries like energy or mining or agriculture — so a crash in commodity prices hurts them the most.
The “good” news, if there is any, is that the turmoil abroad means a flight into U.S. equities for stability and dividends. And, of course, Treasuries could tick even higher and provide (for once) a decent income investment that outpaces inflation.
But that’s cold comfort if you are sitting on deep losses in emerging markets … or if you want something a little sexier than 2.5% returns in T-Notes.
- Will the emerging-market crunch make the Federal Reserve keep the pedal down on stimulus to avoid sucking out all the capital? (Hedgeworld via Reuters)
- And the United Arab Emirates and Qatar just graduated to “emerging market” status … but Morocco was downgraded to “frontier market.” (FT.com)
- Oh yeah, and Greece isn’t even part of the developed world anymore. (The Slant)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.