Trepidation in Emerging Markets

Reuters Article

Emerging market equities fell to their lowest levels in nearly five months on Monday to lead a global stocks selloff, while Wall Street struggled to hold on to slight gains as sentiment soured.

Concerns about China’s economic slowdown and its shadow banking sector, combined with expectations that the U.S. Federal Reserve will scale back its bond buying further, have put pressure on emerging markets dependent on external financing.

My opinion: I am more concerned about the hiccup occurring in China than the Fed taper. Any movement in emerging markets due to the Fed taper, I view as merely a realignment of expectations or market correction. On the other hand, if China’s shadow banking issue leaks out into the world then that has very real, structural implications. From what I have heard (opinions from talking heads), the Chinese shadow banking system has little possibility of causing systematic risk around the world. Apparently their financial system is relatively isolated in this regard.

All in all I am very anxious about how emerging markets respond to unexpected global shocks. Referring back to a previous post I made, I think emerging markets are the golden goose for future global growth; therefore, we should pay careful attention to their health.

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