EMs on cusp of a bear market; investors cautious amid global headwinds

Turkey may have helped buoy the lira, but the rest of the developing world is reeling — with stocks on the verge of a bear market.

The MSCI Emerging Markets Index has tumbled almost 20 per cent from a January peak, while a currency measure slipped to the lowest since May 2017. South Africa’s rand was battered by a downbeat assessment by Moody's Investors Service, while a surprise rate hike by Indonesia failed to lift the rupiah for long. A rout in Chinese technology shares spiraled into a broad selloff, with the yuan weakening past 6.9 per dollar. The lira climbed as Turkey took its boldest steps to ward off a financial crisis.

Emerging markets got pummeled amid a turmoil that included everything from a rising US dollar to the end of an era of easy money, prospects of a global trade war, American sanctions and Turkey’s crisis. Many analysts say that the developing world has mostly done its homework over the past decade and central banks are more resilient. While there's no indication of a bigger blowup that will sharply curb global growth, investors are taking a more cautious approach amid wild market swings.

“That the rest of EM is selling off hard despite the lira bounce supports my view that it is not really about Turkey,” according to Win Thin, a strategist at Brown Brothers Harriman & Co in New York. The developing world is likely to be in a bear market into 2019 regardless of the endgame in Turkey, he said.