Reasons Behind Emerging Markets Correction

A confluence of recent events has been pressuring emerging countries' equity markets. Over the past couple of years, emerging and developed markets have been moving in lockstep, but the two have diverged recently.



What's behind this underperformance in emerging markets stocks? It seems that a number of simultaneous developments have contributed to the sell-off:

1. The spectacular decline in Apple shares has put downward pressure on some of its Asian suppliers and related technology firms.

2. Weaker than expected growth in China is contributing to the sell-off.

3. The emerging strength of Japan's exporters due to rapid yen devaluation is hurting the regional competitors, particularly in South Korea. The KOSPI index is down over 6% year-to-date.

4. The recent violent commodity sell-off especially in metals and energy is pressuring commodity producers such as Russia. The Russian export sector is a one-trick pony, except for some arms sales and a sprinkle of IT services. That's why with oil sharply lower, the Russian stock market is down 13% year-to-date. Other commodity exporters, from Brazil to South Africa, got hit as well.

5. Negative economic surprises in the U.S. are not helping. The U.S. index of leading economic indicators and the Philadelphia Fed Survey both disappointed today. As discussed, the U.S. entered its fourth year of seasonal spring slowdown. Expectations of weaker demand from the U.S. are hurting emerging market indices.

Bloomberg: Emerging-market stocks dropped to the lowest level in almost five months as Apple Inc.'s Asian suppliers retreated on speculation sales are slowing, and concern grew that the global economy is faltering.

LG Display Co. slid the most in four months, after audio-chipmaker Cirrus Logic Inc. reported an inventory glut that suggests slowing iPhone sales. Jiangxi Copper Co. sank 2.5 percent in Hong Kong, while Russia’s Micex Index reversed earlier gains, closing at the lowest level since June 25.

Brazil’s Bovespa index rebounded from a nine-month low, as Gol Linhas Aereas Inteligentes SA jumped 11 percent. The MSCI Emerging Markets Index fell 0.4 percent to 997.33 in New York, the lowest level since Nov. 28. Stocks joined losses in the U.S. equity market as data on leading economic indicators and Philadelphia-area manufacturing trailed estimates. Earlier in the week, the International Monetary Fund trimmed its global growth forecast.

“It’s global, very much like a cold that seems to be going around,” Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees about $380 billion, said by phone. “Earlier in the year, the macro data was on a more reliably upward trajectory. Now there appears to be a moderation going on.”

There is "moderation going on" indeed.