Emerging market struggle
Aside from the rates hike as well as the effect in inflows and current accounts of emerging markets, there were other factors rooting against emerging markets.
China’s slowdown and change of policy
Then came the Q2 figure for China’s GDP, which had investors on edge about a hard landing. While the world had talked about this many times before, this time, the government’s reaction was different. Instead of throwing stimulus at the market, the government decided to focus on “quality over quantity.” The main concern was that inflation and a credit bubble would exacerbate if the economy were stimulated. The target GDP growth rate was set at 7.5%, way below the close to double-digit growth in previous years.
Heightened geopolitical risk given social unrest
Another factor hindering emerging markets was the increased perception of geopolitical risk in emerging markets. The revolt in Egypt, followed by the riots in Turkey, were a reminder to investors of what could happen in their emerging markets portfolio. Then came the riots in Brazil, which hit many investors close to home. Worse of all, investors in Brazil (EWZ) who kept their holdings in hopes of only a temporary market drop saw deeper losses after the whispers of tapering started and the Brazilian real dropped.
In Brazil, the story is far from over. Next year will be election year, and South American countries tend to attract populist candidates that can jeopardize the integrity of the markets (think Venezuela, Bolivia, Argentina…).