Emerging market stocks throughout the world, from Turkey to Thailand, have plummeted since 2013 with several different indexes down over 30%. In addition, many currencies such as the Indian Rupee and Russian Ruble have fallen sharply against the U.S. Dollar.
Because of this, some are expecting a financial meltdown in developing countries that will affect the rest of the world. But there are several reasons to not expect a repeat of the 1997-1998 Asian Financial Crisis of last century.
Crises in the developing world have historically been caused by issues such as bank failures, an extreme lack of foreign currency reserves, large public debt and tepid growth. These are all problems which are not present in today’s economic climate.
Firstly, as shown by the map below, emerging markets now have far less debt as a percent of GDP than their developed counterparts
Low Debt, High Liquidity in Emerging Market Economies
In addition, banks in Asia and Latin America have some of the highest liquidity in the world. According to the World Bank, those in countries such as Indonesia, The Philippines and Brazil have higher liquidity than any banks in Europe or the United States.
Secondly, most developing nations have foreign currency debt as a percentage of GDP far below worrying levels. For example, Thailand’s trade surplus has fallen from 51% in 1996, to 17% today. Brazil’s has fallen from 26% to 17% and Russia’s from 19% to 13% during the same period.
Lastly, the stock indexes of most emerging markets are arguably forming support levels. Stock markets in countries such as China, Malaysia, India and Turkey have stayed near their lows and could potentially rebound later in 2014.
In fact, Bloomberg recently reported that the MSCI Emerging Markets Index is currently trading at 11 times reported earnings. This is a 40% discount from the MSCI world index and the widest gap in over five years.
In conclusion: although money has recently flooded out of emerging market stocks, they still have very solid fundamentals and extremely attractive valuations from a macroeconomic standpoint. This may be a great year for them.
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