Global markets in turmoil once again

The Argentine peso has shaken emerging markets across the world, and the outlook for equity markets doesn't look that bright any longer

It took an Argentina to shake the world out of its slumber and accept the problems at hand. Participants at the ongoing World Economic Forum at Davos were busy predicting a rosy future when Argentina decided to relax restrictions on purchase of the US dollar. This was done after its currency plummeted by 20 per cent in a month. Its government devalued the currency by 12.7 per cent, the biggest such move since 2002.

Global currencies adjusted to this drop in the Argentine peso with the biggest impact being felt in the emerging markets,
especially those suffering from high current account deficits. The ripple in currency market led to a sell-off wave in equity markets. Markets, starting from the US declined.

Unlike in 2007-08 where the crisis started in the US and 2009-10 when it was in Europe, this time around the crisis is popping up in different continents and unfortunately all of them are in the emerging market space. While Argentina’s solution of devaluing its currency is no solution at all since its deficits, inflation and unemployment are increasing, and there is no sign of growth to come out of the mess. Similarly, the Venezuela currency has also declined over 30 per cent. Turkish Lira is at a new low while currencies of Russia and South Africa are at 2008 lows.

The other problem that is slowly emerging is the crisis in China – the GDP growth rate has touched levels last seen in 1999. It is also staring at a possible banking crisis especially in housing, mining and infrastructure sectors. While the country has enough reserves and political muscle to handle the crisis, its sheer size and the fact that it was the key driver for growth especially for commodities around the globe is impacting countries like Australia and Brazil, which are heavily dependent on commodity exports.

As for India, its current account deficit and foreign exchange reserves have improved, and the country has seen huge dollar inflows in the equity market over the last one year. According to Bloomberg, volatility in the emerging market equities has jumped to its highest level in the last two years with 60 per cent of these bets being placed on the bearish side, the highest level since July 2013.

The only silver lining in the current scenario is that the US Federal Reserve may be compelled to pause its tapering given the fall-out of its move. The impact of taper can be seen in emerging economies with funds willing to place their bets on stronger economies rather than emerging markets. Apart from valuations which are at a long term average, there is little happening in India that can attract investors. With elections round the corner and sound bytes expected to get shriller, it would take a brave heart foreign investor to bet on India.

Further, this time around the trouble seems to be closer to home (China) than earlier. Lot of investors club India with China in their investing strategy and China was always given the big brother status. Thus the mentality, especially for an ETF investor would be that if China is doing badly, India could be worse off.

At best what we can expect is trading bets by these investors, but that would mean ‘hot money’ moving in and out of the country.

The rupee has already touched the 63 mark with only two days of slide in the markets; once again it is the stability of the rupee that will decide the stability in equity markets. What is clear however is that 2014 promises to be more volatile. Argentina is just the first domino which has shaken the world market. Imagine the impact when it falls, which economists says is a question of ‘when’ and not ‘if’.