Emerging markets were hit hard by a global equity sell-off on Monday, with shares in Taiwanese and South Korean technology hubs plunging, dragging the MSCI benchmark index for this asset class to its heaviest losses in over two years. This event underlines the volatility and uncertainty currently prevailing on global financial markets, with potentially significant repercussions for investors and the economies of emerging countries.
Significant fall in the MSCI Emerging Markets Index
The MSCI Emerging Markets Index fell by 3.1% at 6:10 a.m. in London, the biggest drop since June 2022 on a closing basis. This brings the index’s two-day decline to 5.6%, the worst since March 2022. The benchmark reached its weakest level since April, underlining the downward pressure on emerging market equities.
The sharp decline reflects investor concerns about a potential global economic slowdown, fuelled by factors such as geopolitical tensions, supply chain disruptions and restrictive central bank monetary policies. Investors are fleeing riskier assets such as emerging market equities for safe havens like the US dollar and gold.
The impact on emerging market economies
Falling stock markets in emerging markets will have a negative impact on their economies. A fall in share prices generally translates into a reduction in household wealth, which can weigh on consumption and investor confidence. In addition, companies may find it more difficult to raise capital to finance their investments, thus slowing economic growth.
The countries hardest hit are likely to be those that rely heavily on foreign capital, such as emerging Asian economies. Investors’ flight to safety can lead to capital flight and depreciation of local currencies, making imports more expensive and fuelling inflation. The governments and central banks of these countries will probably have to intervene to stabilize their markets and support their economies in the face of these headwinds.
