Emerging Markets Stumble as Global Investors Sour on Risk
Emerging markets tumbled in the second quarter after a stronger dollar and higher U.S. interest rates led many investors to flee from riskier investments in the developing world.
The MSCI Emerging Markets stock index fell 8.5% over the past three months, the index’s worst quarterly performance since the third quarter of 2015. Emerging-markets bonds lost 3.6% in the J.P. Morgan EMBI Global Diversified, a benchmark bond index.
Currencies in places like Argentina and Turkey, which rely heavily on outside capital to finance their budgets, dropped the most against the dollar. That raised fears that their dollar debt would be harder to pay off and more expensive to sell, widening their deficits.
Fears that the U.S. and China could escalate a trade dispute has become another concern, especially for trade-dependent countries like Russia, South Korea and Brazil.
Emerging markets’ recent declines cut short a rally that had powered these stocks and bonds higher in 2017, as the period of low interest rates caused many investors to look at Asia, Latin America and Eastern Europe for yield.
Some emerging-markets investors say they are ready to dip their toes back into these markets, believing that recent declines make prices attractive again. But many global investors say they are hesitant when the Federal Reserve and other major central banks are paring back the stimulus policies that kept global interest rates low and encouraged risk. At the same time, higher oil prices are delivering a blow to countries that rely heavily on oil exports.
“We will stay cautious,” said Andy Wong, senior investment manager at Pictet Asset Management’s international multi-asset team.