Remote emerging markets stoke fears globally

Once in a while so-called emerging markets hit some turmoil and we start hearing about currencies which only normally feature in table quizzes. So now in the news not only do we have familiar names such as the Russian rouble and South African rand, but also the Vietnamese dong and the Kazakh tenge.

If it all seems far away and unimportant, then think again. World equity markets hit the skids again yesterday – turning recent losses into a trend – leaving investors worrying about the implications of all this.

At the heart of the market fears is that world economic growth is under threat. The worries have been brewing for some time now, but increased sharply last week when China let its currency, the renminbi (of which the yuan is the basic unit), devalue.

Commodity prices

This raised fears that growth there was slowing and that official figures showing a 7 per cent GDP rise in the first half year were not reliable. Weaker growth than expected has already hit commodity prices – everything from oil, to iron ore to the low milk prices hitting farmers here.

Many emerging markets are commodity producers – for example, Russia, a big oil producer is mired in recession. The Chinese devaluation, meanwhile, while not enormous in size so far, follows other more significant devaluations, such as the Russian rouble which is down almost 50 per cent over the past year.

Add in the possibility of US interest rates starting to rise – which will attract cash back to the US and dollar assets – and you can see why other emerging countries are under pressure. Yesterday the Kazakh authorities allowed their currency to float and it immediately dropped over 20 per cent.

Currencies from South Africa to Turkey to Malaysia are also falling, raising fears of a chain of competitive devaluations as countries try to grab advantage for their exporters.

Equity investors across the world are selling for the simple reason that China and other emerging markets have been the key contributors to world growth in recent years. If they slow too quickly, will the US, the UK and a still-faltering euro zone be able to take up the slack?

The hope had been that China might gradually slow and there would be a transition where the more developed countries grew more quickly. Now the US Federal Reserve is in a bind wondering when to start increasing US interest rates and all the signs are that euro zone rates will stay low for a good while yet.

The unanswered question is whether the big developed economies can now build growth momentum, or if below par growth is now the new normal.