Market Fear #1: Emerging Trouble in Emerging Markets
Click to Enlarge For months, stocks in emerging markets have been badly underperforming seemingly invulnerable U.S. equities. After peaking in mid-October, the iShares MSCI Emerging Markets ETF (EEM) has been on a steady downslope and is now falling into what looks like a sinkhole.
They’ve got problems.
Especially China, which is watching in horror as its export-driven economic miracle becomes a nightmare of excess credit, overcapacity, asset bubbles, vulnerable banks, a shrinking workforce and higher wages. Chinese financial institutions repeated the sins of U.S. banks during the housing bubble, repacking shoddy commercial loans into off-balance sheet vehicles and dumping them on investors who believed they carried an implicit guarantee by the issuing bank. We could see a default on one of these vehicles by the end of the month.
Adding to the pressure was a weaker-than-expected manufacturing activity report out of China on Thursday.
But it’s not just China. The Fed’s tapering actions are causing capital outflows and currency weakness in many emerging markets (on expectations of a stronger dollar), collapsing markets and exchange rates from India to Thailand and Argentina.