Emerging Markets Are in the Fastest Collapse in a Generation

(Bloomberg Businessweek) -- Emerging markets are having the worst start to a year since the asset class came into being in 1988. The brutal losses have erased almost $5 trillion from equity values since mid-January, with stocks in Colombia, Greece, and elsewhere down more than 40%. Emergency rate cuts from South Korea to Turkey did little to calm investors, who pulled a record $4 billion from emerging markets exchange-traded funds over the five days ended March 13. Latin American currencies keep hitting lows against the dollar. Mexico and Colombia, countries that rely on oil revenue, saw their currencies fall more than 20%.

The crisis has been especially dramatic in Brazil. Six times in eight days, stock markets fell sharply enough to trigger the circuit breakers that kick in to halt trading when losses are too steep. The real sank 2% on March 9, when oil crashed, then 3.7% two days later and another 3.2% on March 16. The rapid drop in the real will raise the price of imports, adding pressure to inflation and forcing companies and people to revise their budgets. “It was six months in one day,” says Marco Antonio Mecchi, a 25-year market veteran who founded MZK Investimentos. Mecchi and two other Brazilian investors described an exhausting few days—hundreds of unread messages, long hours watching screens flash red, and sleepless nights watching Asian markets.

But the crash wasn’t hitting just the professional traders of São Paulo. Low interest rates—a novelty in a country scarred by years of hyperinflation—helped to pull many small investors into the stock market in recent years. Retail investors accounted for 18% of local stock trading last year, the highest share since at least 2013. Some of these new players are now enduring their first stock market crisis. Niwton Braz, who sells construction materials, saw his income plunge by about half over the past two weeks because of the uncertainty caused by the virus. And more than half of his investments were in stocks. “It does leave you in sort of a panic,” he says. “I had plans for that money, but now that will have to wait.”

Brazilian policymakers are in a tough spot. A large stimulus package would harm efforts to reduce the deficit that cost the country its investment-grade rating in 2015. That leaves monetary policy as the main tool to keep growth from stalling. But cutting rates will put more downward pressure on the real, says Anders Faergemann, a London-based portfolio manager at PineBridge, and further erode Brazilians’ purchasing power. —With Felipe Marques

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