How do you view the recent sell-off in emerging markets bonds and currencies?
This market sell-off is different from others since the financial crisis of 2008. The previous sell-offs were generally caused by concerns that the global economy would experience a liquidity crunch and enter recession, or that Europe would break up. So, they were based on fears of weaker economic activity, potential default in Europe and more deflationary scenarios.
This most recent sell-off is not due to that at all. No one is forecasting a global recession. This is the first sell-off due to concerns that the U.S. economy might be strong enough to induce a change in policies so that interest rates will be reset and that quantitative easing will be unwound to more normal levels. This sell-off is also very heavily concentrated in the emerging markets and has affected all emerging markets assets — currencies, bonds and stocks.
It is true that growth rates in some major emerging markets economies — China, India, Brazil — have come in lower than consensus forecasts, which has exacerbated the sell-off?
On the corporate front, profitability has come under pressure in some sectors and markets.
However, one should keep in mind that, although growth is slowing in several developing economies, it is nothing like it was in 2008.
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