Emerging markets not out of the woods

EMERGING markets (EMs) appear to have stabilised after a rocky start to the year that was brought on by a currency crisis in Argentina, weak economic data from China and political unrest in Turkey, Ukraine and Thailand. Here, even though the Singapore market is classified as one of two "developed markets" within the MSCI Asia ex-Japan index (the other being Hong Kong), stocks also dropped sharply along with other Asian EMs - the STI lost almost 7 per cent in the first five weeks of 2014.

The January sell-off in EMs was quickly transmitted to developed markets (DMs) leading to worries of a contagion-type global meltdown reminiscent of 1998's Asian financial crisis; however, because DMs have quickly regained all their lost ground in February, most EMs have also rebounded off their 2014 lows. This recovery in EMs is welcome and, some might argue, overdue since the situation today is very different from 1998 - EMs now have flexible exchange rates, sounder banking systems, relatively low public and private debt and considerable reserves. Still many EM worries remain. First, the US Federal Reserve's tapering of its quantitative easing (QE) asset purchases that were aimed at driving down long-term interest rates appear to have begun and looks set to continue under new Fed chairman Janet Yellen. Most analysts believe that the Fed would continue to taper at every Federal Open Market Committee meeting this year, which means that QE could be fully withdrawn by the end of this year.

In the meantime, stimulus money which flowed to EMs from 2008 to 2013 in search of higher yields is now flowing back to DMs - the US market, for example, first fell almost 7 per cent in the first weeks of the year but has since recovered and is now near new all-time highs.