News Column

Terry Murden's view : Investors run for home as emerging markets falter

January 26, 2014

Terry Murden

GLOBAL stock markets are likely to open nervously this week as traders assess the damage of political mismanagement and over- optimistic growth forecasts in emerging markets that prompted Friday's sell-off.It has long been a given that the developing nations are the place for investors to pour in capital. Well, the chickens may now be coming home to roost as prospects are revisited and the realities of political uncertainty kick in.On Friday the FTSE 100 fell 109.5 points, its biggest single-session fall this year, while the FTSE Eurofirst 300 index - a measure of the biggest companies in Europe by market capitalisation - had not fallen so much in one day since June.Aberdeen Asset Management was the worst hit of the British stocks because of its exposure to these territories. Aberdeen has attempted to diversify its portfolio by acquiring Scottish Widows Investment Partnership , but emerging markets will still account for 57 per cent of its sales.Analysts have been expecting a general shift of funds out of these regions and back into developed economies, a transition likely to accelerate as the recovery in the established western nations takes hold. According to the most recent data, investors have been pulling funds from emerging stock markets this year with the United States , Japan and the gold market among the beneficiaries.The domino effect across global markets on Friday suggests a common factor but in fact the causes of Friday's rout were varied. The trigger point was Argentina where the government gave up its battle against the peso's decline. Strict foreign exchange controls were relaxed amid claims of political incompetence and fears of a return to hyper- inflation.Brazil and South Africa are worried by a slowdown in China , which is a big importer of raw materials from both nations. Russia is being impacted for similar reasons, while Turkey and India - two of the nations expected to show significant growth - are concerned that the withdrawal of the US stimulus under Federal Reserve chairman-designate Janet Yellen may add to any slowdown in funds to finance their expansion as investors return to the US.The direction of markets will also be dictated by the relationship these developing nations have with western economies and their ability to remain competitive. "Reshoring" of work from Asia and other low- cost regions to Britain is now being promoted by Prime Minister David Cameron .The prospect of a currency crisis may have spooked the markets, though it would be premature to think that expansion in emerging markets will be brought to a sudden halt. They are not called emerging markets for nothing and prospects remain positive, if not quite so bullish as previously thought.Evidence from Turkey and India alone suggests they are on a long road to transforming their economies while China is still described in emerging market terms even though it challenges the US as the world's biggest economy. Furthermore, as explained above, China's power, size and influence is now such that its development has a direct bearing not only on other emerging markets but on the developed economies too.

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Source: Scotland on Sunday

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