Emerging markets beaten back in August as China chills the mood

By Rodrigo Campos and Marc Jones

NEW YORK/LONDON (Reuters) – Higher global interest rates, difficulties in China, a stronger dollar plus another coup in Africa this week have slammed the brakes on what is still a solid run for emerging market assets this year.

Below are five charts showing what’s been moved and/or shaken:


MSCI’s 24-country emerging markets (EM) stocks index is down 6% this month. That is its sharpest drop since February and has also pushed it into the red for the quarter.

It is still up for the year, though well below the 13.5% gain this year for MSCI’s main global index, which has benefited from a boom in U.S. “mega-cap” stocks.

China has been EM’s main problem. Chinese stocks make up roughly a third of the MSCI’s index’s weighting and are down nearly 9% this month due to a spluttering economy and worries that another wave of property developer defaults is looming.

On the flip side, Turkey’s stocks are flying again due to President Tayyip Erdogan’s post-election return to more orthodox economic policies. It jacked up interest rates by a whopping 750 basis points this month.

Another big interest rate cut in Hungary, meanwhile, boosted its stocks and Egypt’s have powered higher too. Many countries’ share markets do well when inflation is surging as locals often pump their money into equities rather than watch it get eaten by inflation.

“The confluence of global risk-off factors drove large non-resident portfolio outflows in August with EM equity and debt clocking four straight weeks of outflows,” Katherine Marney, an emerging markets analyst at JPMorgan said this week.


On the surface, it has been the same story for emerging market currencies. The main catch-all EM FX index is also down the most since February, but some of the underwater currents have been diverging.

In Latin America, Brazil and Colombia’s currencies have seen their biggest monthly drop in almost a year, while Argentina has devalued its long-troubled peso by more than 20%.

South Africa’s rand is down, Turkey’s lira is up and China’s yuan and Malaysia’s ringgit are down for a fourth month in the last five.

“The markets that have underperformed are the lower-yielding markets like Asia,” Mike Arno, a portfolio manager at Brandywine Global, said. “They have significant negative carry so those markets have lagged.”

JPMorgan’s Marney added that the key to flows for the rest of the year also depended on where the dollar goes from here.

“If the dollar continues to strengthen – as forecast by our FX strategy team – then August could prove a bellwether signalling continued (EM ex-China) portfolio outflows.”


China’s property market woes have come back with a bang amid fears that another of its biggest developers, Country Garden, is on the brink of default.

Bonds have tumbled and the main index of Chinese property stocks is down more than 13% this month, almost doubling its loss for the year.

Those of Evergrande, the original poster child of the crisis, dropped nearly 80% when they resumed trading after almost 18 months, while Country Garden’s have slumped almost 45%.

“The market doesn’t seem to think that China is a major threat,” said Aegon Asset Management’s head of EM debt, Jeff Grills. “I’m a little bit worried it is going to be wrong.”


Turkey’s markets have been encouraged by this month’s super-sized rate hike that confirms, for now at least, that the country has returned to the kind of orthodox economics spectacularly absent over the last two years.

Though that has meant its dollar-denominated bonds have lost around 4% this month – higher rates make existing debt with lower rates less attractive – Turkish stocks are up 9% and the lira’s 1% gain is its first monthly rise since late 2021.

“It looks like orthodox Erdogan is back,” said Van Eck’s head of active EM debt Eric Fine, adding that the firm was upbeat on Turkey’s lira bonds for the first time in quite a while.


The other big trouble spot has been Africa, where debt markets have seen a sharp pullback.

This week’s coup in Gabon sent its bonds skidding and came hot on the heels of one in Niger last month. Combined with other global pressures the “spread”, or interest rate premium, investors demand to hold the bonds in JPMorgan’s Africa “Nexgem” index has ballooned out 108 basis points (bps).

That compares with an 8 bps improvement in the equivalent Latin American index and the more manageable 20 bps widening on the EMBI Global Diversified index, according to Viktor Szabo, an EM debt portfolio manager at abrdn in London.

“The coup in Gabon was the last kick, but the one in Niger had already caused some concerns,” Szabo said.

(Reporting by Marc Jones in London and Rodrigo Campos in New York; Editing by Alex Richardson)