Is the current turmoil in emerging markets just another scare, or is it the start of a prolonged bear market? That’s the question uppermost on investors’ minds at the moment.

We’ve seen such episodes of panic before. Since the financial crisis of 2008, markets have been battered by the Eurozone PIGS (Portugal, Italy, Greece and Spain) crisis, the taper tantrum, Brexit and the Chinese scare and they’ve emerged stronger from each of these, going on to scale new highs.

Is it any different this time? What investors really want to know is: will central banks rush to the rescue of the markets this time, too, pulling back from further rate hikes, talking about doing whatever it takes to keep markets on an even keel?

Much depends on the stance taken by the US Federal Reserve, as markets take their cues from it. Last week, Fed chairman Jerome Powell said that interest rates are still accommodative, the Fed is currently a long way from a neutral rate and they could even go past neutral.

This is very different language from that used by the previous Fed chairpersons and it led to the yield on US 10-year Treasury notes going past 3%, with concomitant damage to emerging markets.

Markets have for years been operating under the assumption of the Fed and other developed country central banks backstopping the risks. The worry is that Powell may no longer be reading from that old script.

Why would he do that? Well, the US economy is red-hot, thanks to President Donald Trump’s late cycle fiscal pump priming. US unemployment is at its lowest in almost 50 years and wages are rising.

The jury is still out on whether inflation poses a threat but the September Purchasing Managers Index (PMI) for the US showed that prices charged for goods and services accelerated to the fastest in nine years.

At the same time, the Chicago Fed National Financial Conditions index showed that, in spite of Fed tightening, financial conditions now are the loosest since the financial crisis. Small wonder the US markets are doing so well.

We all know the reasons for the current unravelling in emerging markets—a strong dollar, higher US interest rates, reversal of capital flows and weaknesses within some emerging markets have all contributed.

The US Fed has also started to shrink its balance sheet and this “quantitative tightening" has a more direct impact on dollar liquidity than increases in interest rates.

The fact that a prolonged period of very low interest rates and abundant liquidity has led to asset bubbles in many markets has magnified the risks. The political backlash against globalization and the geopolitical tensions add to the uncertainty.

What about the Indian markets? Our key vulnerability is to high oil prices. With oil prices low, Indian markets could breeze through the twin shocks of demonetisation and the introduction of the goods and services tax (GST). But when oil prices go up, the current account deficit widens, the fiscal math starts to unravel, the currency starts to plummet.

A worrisome additional factor this time is the fragility of our financial system. To be sure, economic growth is strong, but a large part of that was, until recently, fully discounted by the market.

Also, political risk looms large in the months ahead. And India, like other emerging markets, is exposed to the risk of the strong dollar and the withdrawal of global liquidity. In the midst of all this, the Reserve Bank of India’s signal that it is perfectly willing to let the rupee find its own level, without applying the conventional balm of higher policy rates, will not be comforting for foreign investors, already badly bruised by the plunging rupee.

It is entirely possible, going by their pusillanimous track record, that central banks in advanced economies will blink and continue with easy money if their markets get affected. That will bail out the markets once again, but will only kick the can further down the road.

As a report from United Nations Conference on Trade and Development (UNCTAD) put it: “The landing is likely to be harder, and the external effects more damaging, the more prolonged the speculative spiral."

Manas Chakravarty looks at trends and issues in the financial markets. Respond to this column at manas.c@livemint.com

Close