Emerginvest Blog

Hello All,

Last week’s economic fallout has left many people shell-shocked and asking the question “How could this happen?” Every economy in the world has been affected and I personally believe we won’t fully realize the ramifications of it for multiple months at the earliest. The worst part is that the vast majority of the people who will be the most affected are those that don’t even understand what’s been happening in the financial sector.

In an AP article released in the Seattle Times this morning entitled: “Emerging Markets Suffer as Foreigners Withdraw,” the author discusses how many of the frontier and emerging market economies will be hit the hardest as investors pull out their money. In the middle of one of the worst economic periods of stability in history, investors are running for the hills (or wherever they perceive there is sure-footing). According to the Emerginvest heat map, China’s Shanghai A Shares index is down 66.5% for the year (FXI), India is down 43.4% (INP), Russia is down 63.5%, and the iShares MSCI Emerging Markets Index is down 54.4% since its high last year (EEM) (to name a few).

Here’s the Emerginvest Outlook Graphically: (Click to Enlarge)

Investors immediately write off emerging markets as their “risky” assets, so those are typically some of the first to be sold. The Seattle Times article states that: “private sector capital flows to 30 emerging market nations across the world will fall by nearly a third from last year.”

While there are tremendous up and down swings in emerging markets, every economy in the world is being rocked by the financial waves. It’s just the environment. Yet, according to the Times article:

“The exodus has prompted a chorus of protest in the emerging world: We did not cause this global meltdown, our economies are still growing, our banks don’t have much exposure to the toxic securities at the core of this crisis.

Why must we suffer, they ask.

‘It doesn’t seem fair to me that those of us who endured so much hunger in the 20th century, who began to improve in the 21st century, should have to suffer due to the international financial system,’ Brazilian President Luiz Inacio Lula da Silva said recently.

India’s Finance Minister P. Chidambaram this week reiterated that India’s economic fundamentals are healthy. ‘We must banish fear,’ he said.”

Without arguing about who is to blame for the banking crisis, the truth is that an extremely significant portion of foreign investment is being sucked out of these countries’ economies – many of whom have been relying on it to fuel growth. For the most part, their fundamentals are strong, and yet they are feeling the windfall just as much as those countries with large amounts of toxic debt like the US. While I don’t 100% agree with the spin that they are merely victims in this mess, they are more vulnerable than most of the developed markets and I can personally see where their public outcry originates from. Their protest is that they didn’t do anything wrong in the financial mess. However, even if that was 100% true, their plight is based on foreign investors’ perceptions of risk. That isn’t necessarily a fault of the global economic system, but more a “consumer mindset” to steal a marketing term.

I honestly don’t know yet if the recent economic shift will make investors think of emerging markets as more or less stable. I would like to think it would shift the common investor’s perspective to relatively “more stable” because of the developed markets’ recent volatility recently, but we will have to wait and see.

However, emerging and frontier markets aren’t the only ones crying out for a change to the financial system. Four hours ago, British Prime Minister Gordon Brown called for a global economic summit. According to an AP article: “Britain Calls for Global Finance Summit,” Brown said: “I believe there is scope for agreement in the next few days that we will have an international meeting to take common action … for very large and very radical changes…. The IMF has got to be rebuilt as fit for purpose for the modern world. We need an early warning system for the world economy.”

Building on my last comment, I think that everyone – from governments to common investors, have realized that the world economies are much more closely linked together than they had previously thought, and are subsequently much more vulnerable to global movements. I think that most had viewed developed markets as fortresses of security, and after the record lows of last week, investors had a rude awakening. At this point, I do believe a global summit will take place after the unprecedented unified response from world financial leaders, however I don’t know what kind of result we should expect to see from such a meeting.

Regardless of the result, I think that it is the best response to the emerging markets’ outcry as they will see. They cannot change investor’s perspectives of risk overnight, but a successful outcome of such a summit would raise their standing in the world financial community.
It will certainly be an interesting few months.

Best,
Jonathan

Originally Posted at: Emerging Markets Blog - Emerginvest

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Filed under: Commentary on World Financial News, Developed Markets, Emerging Markets, Jonathan (Marketing), World Analysis