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Are Emerging Markets a storm in a teacup, or a storm that’s brewing?

First published: Prospectmagazine.co.uk, 6/02/2014

Just when we were all being lulled into thinking that the global economy was on the mend, trouble has broken out yet again. This time, it’s in emerging markets. Since the beginning of the year the currencies of Turkey, Argentina, Brazil, South Africa, Russia, Hungary, Indonesia, Chile and others have fallen sharply. Several countries have raised interest rates to try and stabilise markets.

This latest financial unrest has undermined global equity markets, and raised concerns about spillovers into the West. Problems in Turkey could affect Greece and Cyprus. Problems in South America could reflect on Spanish banks. Higher interest rates in emerging countries could add to the deflationary pressures already coming from weak global demand, and liquidity tightening in the US and China.

While vigilant about these things, there is a sharp difference of opinion between those who believe the current emerging market currency unrest is momentary and manageable, and those who see it as a darker harbinger of more serious problems in precisely those countries that are supposed to be the beacon of global economic growth in the world. After all, emerging markets now comprise about 40% of global output, and over 50%, depending on choice of measurement. They have recently contributed three quarters of global growth, though that proportion will be markedly lower in 2014-15 as the growth pendulum shifts westwards. So, storm in a teacup, or proper storm?…“more:”