NEW YORK (The Street) -- Turmoil in emerging markets could blow the economic recovery off course, fund managers warned, as nations from Turkey to Argentina face serious threats to sustainable growth. Yet others predicted the worst impact will be felt this year, with China the key to underpinning stability across emerging nations.
Emerging market woes have shaken global equities in 2014, contributing to a near 5% fall in the S&P 500. Several point to last May as the first hint of problems, when the suggestion that Federal Reserve stimulus could be wound back shook emerging markets. Strong Chinese growth and global stimulus packages had fueled growth in many of these nations since 2009, with around $4 trillion of private capital invested in emerging economies in search of higher returns after the U.S. credit crisis. This capital is now leaving emerging markets as stimulus is wound back, exposing large current account deficits and unsustainable growth.
Strategists said the diversity of problems faced by several emerging nations means there will be no quick fix.
Matthew Beesley, head of global equities for Henderson Global Investors, said there is no homogenous problem with the asset class, but a series of countries being exposed by the withdrawal of capital and its return to the U.S. "It will be an extended long-run issue that is going nowhere," the London-based portfolio manager told TheStreet.Beesley noted the lack of homogeneity among emerging markets, with Indonesian equities gaining this year as many other markets have tanked. He is wary of a potentially negative spiral, which could see emerging market fears inhibit the confidence of corporates to invest. "The country specific EM wobbles should remain exactly that -- we will have live with them (in the background hopefully) but the fear is they become the thing that inhibits global economic growth in 2014," he said. Others were more optimistic.
"We need more pro-growth economic policies such as less taxes, less onerous regulations and more free trade." Cote said he still expects equity markets to be higher by the year-end and advises investors to stay globally diversified.
-- Written by Jane Searle in New York