Analysis: Emerging markets as vulnerable to contagion as ever

Mon Jan 27, 2014 1:52pm EST
 
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By Sujata Rao, Daniel Bases and Vidya Ranganathan

LONDON/NEW YORK/SINGAPORE (Reuters) - Emerging markets may be unrecognizable from the small and fragile economies that fell like dominoes 15 years ago, but they are just as vulnerable today to the same sort of indiscriminate selling when investor panic sets in.

As even the relatively robust economies of Mexico and Poland now feel the heat from disparate flashpoints from Turkey to Argentina, there are growing doubts that emerging markets have built any immunity to such contagion.

The wildfire engulfing the developing world is starting to look very like the currency runs of the past, such as the Asian, Russian and Latin American collapses that began in 1997.

Dominic Rossi, Global CIO for equities at fund manager Fidelity, likens the current wave of plunging currencies, equities and bonds to watching an old film - one in which some of the biggest emerging markets could feature.

"We've seen this movie before," he said. "One emerging country after another gets left stranded on the shore as the tide goes out. The weakest ones first, Argentina and Turkey, soon to be followed by Brazil, Russia and others."

Emerging markets have been inflated in recent years by huge amounts of cheap cash created by the U.S. Federal Reserve, much if which found its way into developing economies in the hunt for better returns. With the Fed scaling back the program, that flow is reversing and the currencies of countries with the biggest economic and political problems - notably Argentina and Turkey - are diving.

Investors' behavior may not have changed all that much from during the past crises, even though many emerging economies now have more flexible currencies and trillions of dollars in foreign exchange reserves. There are three main reasons why these markets could again suffer the capital flight that plagued them during the 1990s.

First is the scale of money that has moved to developing markets over the past decade and now dwarfs the sums which fled in panic 15 years ago.   Continued...

 
Traders work on their computers during the start of the first trading session of 2012 at the Istanbul Stock Exchange January 2, 2012. REUTERS/Murad Sezer