The year 2018 will go down in history as one of the worst for emerging markets, frontier markets and most African markets.While it’s still a couple of weeks before year end, it is highly unlikely that the losses recorded so far in the year will be reversed.
Stock markets in the emerging economies experienced a massive sell-off this year, when investors feared that escalating financial troubles in countries like Turkey and Argentina could spill over to other emerging economies.
At the close of November, the MSCI Emerging Markets Index, which tracks large and mid-cap stocks in 24 countries, had fallen by more than 20 percent from its peak in January 2018.
In Africa, apart from Malawi and the hard to read Zimbabwe Stock Exchange, almost all markets were negative in both local currency and in US dollars as shown on the table accompanying this article.
Only Ghana, Tunisia, and Rwanda had US dollar losses that were in single digits. The rest had double digit losses, a carnage.
But what could
have caused the
If one wants to go back to the root cause of the upheaval, one has to go to the days of quantitative easing, both in the United States and in Europe. As the regions worked on stimulating economies hit by the 2008 financial crisis.
From that time, the US and Europe kept interest rates close to, or below, zero to help their stagnant economies recover from the 2008 financial crisis. Low interest rates meant returns on stocks and bonds in these markets became unattractive.
This probably created a false illusion for emerging markets, frontier markets and African markets whose asset classes suddenly looked attractive.
Despite the risks being higher, the returns were more inviting. Emerging markets, as a result, enjoyed a rally in stocks, bonds and currencies. For Africa, the popular narrative was that it was the new frontier for economic growth. Its markets boomed amid talk of its huge demographic dividend made up of the world’s youngest and fastest-growing population, rapid urbanisation and rising commodity prices.
But the tide has since changed.
The reverse is now happening as investors react to several signals from the US — faster growth, rising interest rates and a stronger dollar. All three indicate potentially higher returns on US investments and thus act as a magnet for money. As a consequence, prices for riskier assets that had benefited from ultra-low interest rates are repricing as rates move up.
Then there is US President Donald Trump, now calling himself Tariff Man after he started a trade war with China.
The trade war started in March 2018 when Trump imposed tariffs of $60 billion on imports mostly from China, forcing the latter to respond accordingly with tariffs on US imports; the constant retaliation between the two countries has damaged China’s economy while soya bean farmers are the hardest hit in the US.
Unfortunately, the economic damage is not only confined to the US and China but has spread to emerging markets that rely heavily on investment from both countries for growth and now find it lacking as the two countries scrabble for available funds.
On their own, emerging markets have not been without fault. Mounting debt loads, weak governance, corruption, poor investment policies and stalled growth have made African markets as well as emerging markets more vulnerable than on the eve of the 2008 financial crisis.
These uncertain times for the global economy have threatened the narrative for emerging and frontier markets and this has now painted capital markets red.
Next year could, however, offer relief, that is if Trump and Xi Jinping came come to an agreement.