5 Reasons Behind the Emerging Markets Correction

By Walter Kurtz, Sober Look

A confluence of recent events has been pressuring emerging countries’ equity markets. Over the past couple of years emerging and developed markets have been moving in lockstep, but the two have diverged recently (see figure 1).

What’s behind this underperformance in emerging markets stocks? It seems that a number of simultaneous developments has contributed to the sell-off:

1. The spectacular decline in shares of Apple has put downward pressure on some of its Asian suppliers and related technology firms.

2. Weaker than expected growth in China (see post) is contributing to the sell-off (see Bloomberg story from earlier this week).

3. The emerging strength of Japan’s exporters due to rapid yen devaluation (see post) is hurting the regional competitors, particularly in South Korea. The KOSPI index is down over 6% year-to-date.

4. The recent violent commodity sell-off especially in metals and energy is pressuring commodity producers such as Russia. Russia’s export sector is a one-trick pony, except for some arms sales and a sprinkle of IT services. That’s why with oil sharply lower (see post), the Russian stock market is down 13% year-to-date. Other commodity exporters, from Brazil to South Africa, got hit as well.

5. Negative economic surprises in the US are not helping. The US index of leading economic indicators and the Philadelphia Fed Survey both disappointed today. As discussed, the US has entered its fourth year of seasonal spring slowdown (see post). Expectations of weaker demand from the US are hurting emerging market indices.

Bloomberg: – Emerging-market stocks dropped to the lowest level in almost five months as Apple Inc.’s Asian suppliers retreated on speculation sales are slowing and concern grew that the global economy is faltering.

LG Display Co. slid the most in four months in Seoul after audio-chipmaker Cirrus Logic Inc. reported an inventory glut that suggests slowing iPhone sales. Jiangxi Copper Co. sank 2.5 percent in Hong Kong, while Russia’s Micex Index reversed earlier gains, closing at the lowest level since June 25.

Brazil’s Bovespa index rebounded from a nine-month low, as Gol Linhas Aereas Inteligentes SA jumped 11 percent. The MSCI Emerging Markets Index fell 0.4 percent to 997.33 in New York, the lowest level since Nov. 28. Stocks joined losses in the U.S. equity market as data on leading economic indicators and Philadelphia-area manufacturing trailed estimates. Earlier this week, the International Monetary Fund trimmed its global growth forecast.

“It’s global, very much like a cold that seems to be going around,” Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees about $380 billion, said by phone. “Earlier in the year, the macro data was on a more reliably upward trajectory. Now there appears to be a moderation going on.”

There is “moderation going on” indeed.

World equities vs emerging markets

(Figure 1)


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Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

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  • Andrea Malagoli

    “The spectacular decline in shares of Apple ”

    You have to be kidding me!

    Emerging markets have a whole host of bigger issues of their own, not counting the bad shape of their natural exporting markets. China’s trouble is far bigger than “slowing growth”. China has massive shadow leverage that is going to put pressure on internal demand as well.

  • Alberto

    Right ! Pundits like Mr. Kurtz present a hyper simplicistic market oriented view to be discarded 100%. For a much deeper analys Prof. Pettis is one of the best. I’m quite sure that you know him but for the other readers this is his latest:


  • Mercator

    China is a house of cards. As goes China, so goes the global economy. Odd… everyone hoping the communists pull out of their dive.

  • John

    China’s house of cards has two sheds at the back one is Canada and the other is Australia. The debt to income in both these countries is at record high’s 165% and 145% respectfully. If the commod train slows too much there is no interest rate relief especially for Canada which cannot deviate to far from the US Fed, plus a sinking loonie is a tax on consumers.

  • Andrea Malagoli

    Thanks Alberto, I am in fact familiar with Michael Pettis’ work and I like his analysis as well.

  • Stephen

    Moneyflow makes relative choices.It usually cannot be everywhere in proportionate terms. This in my view is a simple issue of portfolio reallocation. Part of the world is very sickly.That part of the world is also the main client for China inparticular ,but in general for Asia whch is export centric. Money that would have rewarded that business model now looks for the countries and asset areas that have the most appropriate policy response for the global context. Hence,the US has been more popular because it has stayed loose and provided braod support to domestic activity which makes both it’s bond amrket and equity market look better in the beauty lineup. I could say the same for the UK.
    It’s about global growth context and policy response ,the rest is fluff.

  • Alberto

    there is no growth at all in the UK and this is particularly terrible because of the 10% deficit spending. If there is a country on the verge of a catastrophic economical dissolution this is the UK. Look at the evolution of the USD / POUND in the next few months, the USD is the reserve currency, the pound is not, the US deficit is (was) the rest of the world growth engine, a prolonged UK deficit will just sink the country in a deeper hole, the US has still a powerfull industrial complex, the UK has just the financial industry. Look at the financial outflows to Singapore or Hong Kong, if they will accellerate, the country is dead and at a real risk of hyper inflation. Tullet Prebon that is a british financial institution has some excellent analysis and is free. The UK is the only one country experiencing with (for now mild) form of stagflation. If there is one big short this is the pound, much more than the yen or gold.

  • Alberto

    Not to mention the horrible situation for what concern energy. The UK was an energy exporter but now the north sea gas and oil field are exausted and the UK is importing liquid gas from the gulf. The commercial balance is sinking and the only one thing that separates the UK to catastrophic inflation is the money coming back to be recycled by the City. If it stops it’s better not be a british. That’s what I’m trying to look for, but I don’t know how to find reliable data. There is the possibility for an easy self fulfilling short on the british pound. Everything is getting more unstable day after day favouring a distruptive fast rebalancing accordingly to Swenson’s law.

  • Stephen

    You wrote quite a bit.Noy much really worthy of a considered response.Keep on reading the media.

  • AWF

    VWO– one of the largest “EM” ETF has under performed since October 2010
    EWY has held its own but the beware the “Rising Sun” and its printing machine

  • http://macronomy.blogspot.com/ Martin T

    I agree with your prognosis Alberto, the long term prospects for the UK are terrible: poor infrastructures, lack of energy, heavily relying on food import, etc.

    From a long term perspective, the UK is a big short.



  • Miles Protter

    John – is is possible to know the components of Aus and Can debt? ie HH’s, states/provinces, Feds, corporates? I understood that Canadian house price inflation is rampant. It certainly is bad in Aus where I live.

  • John

    Miles…the % levels I state include mortgages. You can search the break downs by province etc. if commods don’t have a more serious sell off, the consumers of these two countries can work their debt levels off over time. These countries also get a double whammy of their currency’s dropping at the same time.

    Personally I watch the oz$ and can$ on a monthly chart gives an idea of global growth, look for them breaking previous highs nothing fancy just one line from the last high on the monthly chart.

    Personally I like fx for assessing global conditions but only long term charts, monthly and yearly

  • John

    I am surprised you guys think UK is a big short, if your Europe Gets hairy again which country are you going to start thinking looks better and better , UK no? I can see a big inflow into the UK, last sovereign with 2nd largest finance sector, lowest corp tax in g20, friendly to tax havens to invest through.

  • Hoffa

    I like Pettis as well, however he do not understand MR. Still well worth a read.

  • Stephen

    It’s ok Joh let them short the UK please !

    The problem is they and indeed the media carryout fairly superficial analysis and they think they understand something.

    I’ll reduce it for you guys. The UK is running about 12mths behind the US give ,or take 6 mths. The lag is simply to do with the way the US can restructure private debt a bit quicker than the UK.Having said that the electoral situation also means we have not timed our fiscal response quite the same as the US. Noticeably that is now changing pre 2015 election and you’ll see a lot more domestically focussed policy coming into play. Short this at your peril especially when the Eurozone keeps bubbling away in the background.

    Your problem is this. This is a financial blog and people here will like the carpenter try to analyse every issue in terms of a solution involving nails. The reality is there is a dimension involving politics,and psychology that is at least as important as the economic data.

    I live in the UK and can read it blindfolded.I have no real doubts about the way I see this unfolding.

  • John

    I agree Stephen, I think UK is a buy right now, the policy issue just started with that massive ‘help to buy’ scheme. The telegraph also reports this morning, another policy announcement expanding help to buy into business loans also.

    UK housing stocks and home retailers

    I have been looking at buying a property actually help to buy for old home kicks in jan 2014 I think, when quite possibly a large demand for homes will ensue

  • Alberto

    Europe is already gone. They are keeping it in “suspended life” up to the german elections that will probably impose a break up. Merckel is loosing steam at her right, I’ve stopped looking at Target 2 as the canary in the mine because it isn’t. Next time, financial flows will go out of the euro and then is gone. The UK is very bad condition because is no more an industrial country and has lost energy and food independency. The fact that in the short term the pound can go well doens’t change the fundamentals. I’m not a trader and I’ve never shorted anything. Wealth is based on production (and consumption of what YOU have produced comes later) and not finance that is just a service, so I’m not living in the west anymore. It’s up to the asian countries, they will decide our destiny. When they will be ready, when their export driven model (export to the west I mean) will be trashed in favour of internal growth and bilateral growth the end of the dollar age will come to an end and the west as a whole will not be at the head of this planet. People living in the west are used to go to asia for a short vacation but they don’t understand that with globalization they seeded their own destruction. I think it’s going to happen in the next 10 – 15 years when the greater of the problems of the western countries will produce its evil output: an aged population do not produce and consumes less and less and costs more and more. Follow the money, the 0,1% is already moving its money out of the west.