As the U.S. economy began its implosion last year, emerging markets–especially those in Asia–were seen as a safe harbor. Oops:
- Shanghai down 53%
- India down 31%
- Indonesia down 17%
- Malaysia down 26%
(The S&P 500, by the way, has outperformed most of these markets, having only lost 18%.)
Part of the “safe harbor” theory was the thesis that emerging-market economies would steam along even as the US economy slumped. This was (is) important not only for investors in emerging markets, but those who do business in them–the globally diversified companies that many analysts tout as immune to a US slowdown. And so far, emerging market economies have held up. The collapse of their stock markets, however, suggests that an economic downturn might not be far off.
What might kill these economies? Three possibilities:
- Inflation. Inflation in China, Russia, and other emerging markets is out of control. China and India has increasingly been changing policies to try to rein this in, and other countries will likely follow. We doubt emerging market central bankers have the magic touch that will eliminate the business cycle that has forever eluded their developed-market peers.
- US and Europe slowdown. Decoupling was a happy theory, but it’s also a fanciful one. Emerging markets buy stuff from–and make stuff for–massive economies that are, at best, slowing. Hard to see how that won’t hit emerging markets.
- Stock markets have crashed. You can argue forever about what “causes” markets to crash, but there’s little doubt that bad ones ultimately affect the economy.
In any event, if emerging-market economies follow their developed brethren into the tank, US and European companies will lose yet another major growth engine. Look out below.