Bloomberg has dubbed the depreciation in many emerging market currencies as “the single biggest sell off… since 2009.”
As a result, argues Benoit Anne, global head of emerging-market strategy at Société Générale, “global emerging markets are now trading in full-blown panic mode.”
This is a significant turnaround from 2009 when emerging markets were seen as the saviors of the global economy. In 2009, when advanced economies’ gross domestic product (GDP) fell 3.43 percent, emerging market economies grew 3.1 percent. Capital poured in – from investors looking for a place they could actually grow their money.
But, according to Forbes, investors don’t invest in emerging markets like they do in developed markets. “Capital rushes in when the economy is hot; when the economy cools, investors dump their local currency holdings. That leaves piles of devalued local currency which the central bank is hard-pressed to prop up. (In developed markets like the US, United Kingdom, Japan, in contrast, investors are more willing to hold on to the currency.)”
What’s more, a cooling economy is exacerbated by the fact that worry breeds panic. Fear of weakening emerging market economies – and the panicked reactions that follow – is a bigger driver of currency depreciation than the weakness itself. Says Forbes: “it is irrational exuberance in reverse.”
What is causing the panic?