Mark Dampier: It's time to purchase, not panic, as emerging markets take a tumble

 

I always enjoy reading financial and investment commentary in the press over Christmas and New Year, especially the predictions for the year ahead. This year I have to admit to having felt somewhat queasy.

I could find little in the way of negativity, but plenty of positive sentiment on the economy and stock markets. While the consensus can sometimes be right it is interesting to note the previous year most people were cautious and the result was stock markets in the developed world having one of their best years in a while.

So, here we are in the first week of February 2014 and stock markets, far from moving upwards, are going through a bout of nervousness and schizophrenia. The source of the problem has been emerging markets, particularly their currencies which have been suffering heavy falls.

Unfortunately, in their mini-panic investors have reduced exposure almost indiscriminately, failing to distinguish between good markets and bad. It is hard to pinpoint a single cause behind the falls, but among those cited are the mismanagement of the Argentinian economy by the authorities there; political corruption scandals in Turkey; riots in Ukraine; and worries over faltering economic growth in China. Commodity-rich economies have also been damaged as investors have shunned the materials and energy sectors.

Concern over the strength of emerging markets has been building for a while though. The developed world's economic recovery has gathered pace over the past year and this has given the US Federal Reserve the confidence to begin tapering its quantitative easing programme.

In recent years QE and the maintaining of ultra-low interest rates across the developed world encouraged investors to take more risk in search of higher returns, and much of the money flowed into emerging markets.

This made it easier for companies and consumers to borrow. This can boost growth but, with the developed world now scaling back QE and the prospect of interest rate rises drawing ever nearer, money is flowing out of emerging markets and back towards developed economies in anticipation of higher returns. Many emerging markets have perhaps had it too easy and have not focused enough in recent years on structurally reforming their economies and boosting domestic demand. Instead they have hidden behind QE.

We have been here before. The Asian crisis in the 1990s was precipitated by the devaluation of the Mexican peso, for example. However, at the time of the last Asian crisis the lending boom was more widespread, meaning few economies were capable of tolerating higher borrowing costs when the US raised rates.

Today many Asian and emerging economies have built up significant reserves with less foreign currency borrowings and exchange rates no longer pegged to the US dollar. This should make it easier to adjust gradually to changing global economic conditions.

Globalisation means emerging market problems have spilled over to the developed world too. Recent poor manufacturing data from the US has not helped confidence. That said, these are notoriously fickle numbers undoubtedly not helped by the vicious winter weather in the States.

Stock markets periodically go through consolidation and correction stages which can be painful, but 10 to 20 per cent drops after a strong period are not unknown. Investors need to keep their nerve. Indeed, those who have regular monthly savings plans could use this opportunity to increase contributions to take advantage of lower share prices.

Emerging markets have had a good ten years so perhaps it is not surprising to see some problems now. The long-term case for investing in them remains strong. Remember, the media generally focus too much on the short term simply because it generates great headlines.

Stock market falls are painful, but provide opportunities to buy funds and stocks at lower prices.

While the US may continue to taper I see little appetite for rises in interest rates, so if you have favourite funds and shares which have fallen in value consider topping up rather than panicking.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

    Day In a Page

    Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

    Cameron lowered the flag for the dead king of Saudi Arabia...

    But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Humanity must be at the heart of politics, says Jeremy Corbyn
    Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

    Joe Biden's 'tease tour'

    Could the US Vice-President be testing the water for a presidential run?
    Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

    Britain's 24-hour culture

    With the 'leisured society' a distant dream we're working longer and less regular hours than ever
    Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

    The addictive nature of Diplomacy

    Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
    Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

    Fashion: Ooh, Lady Chatterley!

    Take inspiration from DH Lawrence's racy tome with equally racy underwear
    8 best children's clocks

    Tick-tock: 8 best children's clocks

    Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
    Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

    Charlie Austin: ‘If the move is not right, I’m not going’

    After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
    Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

    The Arab Spring reversed

    Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
    King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

    Academic claims King Arthur was real - and reveals where he lived

    Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
    Who is Oliver Bonas and how has he captured middle-class hearts?

    Who is Oliver Bonas?

    It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
    Earth has 'lost more than half its trees' since humans first started cutting them down

    Axe-wielding Man fells half the world’s trees – leaving us just 422 each

    However, the number of trees may be eight times higher than previously thought
    60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

    60 years of Scalextric

    Model cars are now stuffed with as much tech as real ones