Morgan Stanley IM: Another Emerging Markets Wobble?

The world economy grew by $14 trillion between 2010 and 2017 according to the World Bank.1  While $4.4 trillion of this came from North America and $0.5 trillion from Europe, the emerging markets accounted for the majority of this growth. The biggest contributor was China with $6.1 trillion, but India at $0.9 trillion, Korea at $0.4 trillion and Indonesia at $0.26 trillion were bigger contributors to growth than Germany ($0.26 trillion), for example.

Over the summer, the market seems to have lost confidence in the continuation of this trend. The Turkish lira dropped 43% year-to-date to August 31 and the Argentine peso fell even further. The major Chinese indices have fallen 18% year-to-date and “Dr Copper” is also down close to 20%.2

Two notions drive the sell-off. On the one hand, countries with significant capital and trade deficits like Turkey and Argentina are under pressure through a combination of high USD-denominated debt, rising oil prices and inadequate policy responses. On the other hand, countries with significant trade surpluses, like China, find themselves under pressure from a fundamentally remodelled U.S. trade policy.

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