Turn for emerging markets to worry

INVESTORS enter the week in a mood of increasing nervousness about the global economy, with deteriorating growth in the United States, Europe and Japan now beginning to bite into once high-flying emerging markets.

It is a concern that was underlined last week when MSCI's benchmark for emerging market stocks hit its lowest level in nearly a year, taking the index down around 28 per cent from its all-time high last November.

The emerging market index, moreover, has been underperforming its developed market counterpart, even though that too has been battered by the credit crisis and ensuing economic slowdown.

While developed stocks as measured by MSCI have lost around nine per cent over the past two months, emerging markets are down 13 per cent.

Some of this is the result of normal trading patterns in which emerging markets outperform when risk appetite is high and underperform when, as now, it is low.

But it also reflects a growing belief among investors that the world economy in general is at risk, and with it the emerging markets that have been a powerhouse of growth and investment gain over the past few years.

"Certainly weaker eurozone economic growth, weaker US, weaker UK is bad news for emerging markets," said Gabriel Stein, senior international economist at investment advisers Lombard Street Research.

"I would be surprised if we don't see some weakness over the next six months, if not faster than that," he said.

All eyes are on Brazil, Russia, India and China. Although growth remains robust in all four countries, there are some signs of trouble. China has seen factory output slowing on weaker export demand while India is expected to miss the central bank's growth target.

"The global economic and financial turmoil is starting to take its toll," said Rob Subbaraman, economist at Lehman Brothers.

Reuters