An emerging market sell-off that sparked investor flight in Turkey and Argentina spread to some of the developing world’s largest economies on Wednesday, sending stocks and currencies lower in Indonesia, South Africa, Russia, Poland and Mexico.
MSCI’s broad gauge of mid- and large-capitalisation equities in the developing world dropped 1.6 per cent on Wednesday, bringing the decline over the past six trading sessions to 4.4 per cent.
Indonesian stocks were the worst performing equities in Asia, tumbling more than 4 per cent, while declines for Chinese shares reached 2 per cent after data showed economic growth was slowing.
Currencies were also under pressure, led by the South African rand, which fell 1.5 per cent, after a slide of more than 3 per cent on Tuesday as new data showed the country’s economy had contracted for the first time since 2009.
Amid fears of broader contagion from the sell-off, European shares retreated on Wednesday morning and Wall Street equity futures indicated a weaker open in New York.
While homegrown problems in both Turkey and Argentina have made them the weakest links across EM this year, there are signs that shaken investors are now looking to reduce their broad exposure to currencies, stocks and bonds in the developing world.
The Mexican peso and Polish zloty are among the more liquid EM currencies and are often used as proxies when risk aversion flares.
“People are now looking beyond idiosyncratic issues and more generally at spillover and contagion, and which economies are most vulnerable,” said Dwyfor Evans at State Street Global Markets.
The rise in the US dollar since April has exacerbated troubles in several emerging economies with the amount of dollar-denominated debt they have more than doubling to $3.7tn over the past decade, according to the Bank for International Settlements.
At the same time, the trade tensions that threaten to slow the global economy are again in focus. A consultation period on US president Donald Trump’s proposal to impose tariffs on $200bn more of Chinese exports expires on Thursday.
As Asian trading drew to a close, Jakarta’s stock market was facing the severest pressure with a 3.8 per cent decline. The rupiah is trading close to its weakest level since the 1998 Asian financial crisis, at 14,930 against the dollar.
Although Asian markets have so far fared better than their EM peers, analysts caution that the region has its own problems. Strategists at Morgan Stanley said the stable renminbi had bolstered Asia over the past month, but added that “risks are building” in Asian currency markets.
They said a pick-up in trade tensions would “not help these markets either”, but pointed out that the impact could be mitigated to some degree if the People’s Bank of China managed to keep the renminbi in check.
“The momentum right now is quite strong, so you don’t want to stand in front of it,” said Tai Hui, chief market strategist for Asia-Pacific at JPMorgan Asset Management.
