Equity Insights: Is This Another Emerging Market Crisis? Or Just a Setback? (February 2016)

Global equity markets have fallen sharply since the new year. And emerging market (EM) equity and credit portfolios have experienced substantial outflows since 2015. In our 2016 Outlook, we envisioned a year of generally low and volatile returns. But now, the key question is whether we are facing a new EM crisis – which could have contagion effects on the global economy – or a more benign outlook for growth.

As a $10.3 trillion economy, China is now significantly larger than both Asia in the 1997 crisis and peripheral Europe in its 2011 crisis. The faltering actions by the Chinese authorities to de-lever and to control markets, as well as to avoid a hard landing by loosening monetary conditions, have increased the pressure on the yuan to devalue as China shifts its currency peg away from the US dollar to a trade-weighted basket of currencies.

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