Emerging Markets: No Crisis to See Here

NEW YORK (The Street) -- Are emerging markets on the cusp of another crisis? No, according to Nomura analysts, though they expect weakness to persist for some time.

Despite recent market tremors, the analysts suggested a "crisis dynamic" will be avoided for several reasons. These include greater differentiation by investors between emerging economies vs. the indiscriminate selling that occurred last June (see dive below) at the first hint of Federal Reserve stimulus tapering.

In addition, emerging market banks continue to extend loans at a healthy pace, Jens Notdvig, Nomura's global head of G10 foreign exchange strategy, told clients. He noted that several countries -- such as Turkey and Brazil -- are beginning to normalize policy after years of very low interest rates, while balance sheets across emerging economies are generally in decent shape.

The weakness in emerging market assets has also been consistent with moves in global risk assets (such as the jump in the yen and gold) rather than showing clear evidence of underperformance, Nordvig argued.

On the flipside, many fund managers still steer clear of emerging market economies -- especially the so-called fragile five of Brazil, Turkey, Indonesia, India and South Africa -- which carry high current account deficits in favor of more stable developed markets such as Europe, Japan and the U.S. On a longer-term basis, they acknowledge clear appeal of backing faster growing emerging economies relative to developed markets.

This isn't to say there aren't pressure points in emerging markets -- check out the jump in foreign currency debt for Turkey and Hungary below.

Nordvig also warned of lingering risks in the most significant emerging economy -- China -- given its recent weak economic data. Overall, however, he reiterated that the general situation across emerging markets does not have crisis-like characteristics.

"We think value is starting to be created, especially (in certain currencies)," he said.

--- By Jane Searle in New York

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