Why outflows are threatening emerging markets (Part 4 of 6)
Tapering fears have reversed the emerging market bonanza
As soon as investors started to see small signs of economic recovery, speculation about the end of quantitative easing started. Analysts pinned the so-called “tapering” of the Fed’s bond buying program to the fall of 2013.
When this happened, the U.S. dollar started strengthening, weakening the local emerging market currencies and causing foreign exchange losses to foreign investors. These losses unleashed a chain reaction of investors withdrawing funds to avoid further losses.
European signs of life accelerate emerging markets outflows
The fears of tapering reached a high point just before the September FOMC (Federal Open Market Committee) meeting. Coincidentally, the macroeconomic data started to show early signs of recovery in Europe. While the signs are weak, for example, improving PMI readings only means that the situation is better than last month, but Europe may still be deep in the hole. However, the downside now seems limited, and the European market has held up since European Central Bank President Mario Draghi said Europe would do “whatever it takes” to prevent a new crisis.
Improving economics and renewed global investor confidence in Europe have further reduced the attractiveness of emerging markets as a whole.
While most emerging markets have been negatively affected, which are the most vulnerable and which are the most resilient? Read on to find out.
Browse this series on Market Realist:
- Part 1 - Why emerging market outflows are hurting local equity markets
- Part 2 - Why China triggered harmful emerging market outflows
- Part 3 - Did quantitative easing affect emerging markets currencies?
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