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Home > Blogs > Moorad Choudhry > Ukraine geo-politics illustrates continuing emerging market fragility

Ukraine geo-politics illustrates continuing emerging market fragility

Ukraine geo-politics illustrates continuing emerging market fragility Moorad Choudhry

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Pre-crash, it was the great “diversity” play for Western-based investors. Following orthodox principles, first described in academic theory by Modigliani-Miller, Markowitz, Fama and others, it made sense – and still does, in many cases – to branch outside of one’s home markets and into developing economies. Not just for relative value purposes, but also for diversification purposes.

Although the crash of 2008-09 didn’t result in any emerging economy bank crashes - not newsworthy ones anyway - it still put a dent in developing country growth rates. Understandably of course, globalization has made economies interlinked; the old adage still rings true that, when the US sneezes, the rest of the world catches a cold.

So what does the market reaction to the Ukraine situation tell us? Stock markets and currencies in an area much wider than Eastern Europe were affected. Safe havens such as gold and Treasuries and Bunds all rose - interlinked relationships again. So what of the whole emerging market phenomenon, which some investment banks have dined out on over the last 20 years?

I’ve had a sneaking suspicion that developing economy markets – as distinct from the developing economies themselves – only really prosper when developed markets do. For external investors, one needs the home market to be strong and stable for the emerging one to also do well - otherwise, it doesn’t. China is the one big exception of course (not that one would classify it as developing or emerging!) but even its GDP performance slows when Western ones do - again understandably so, given the destination of so many of its exports.

In 2014, even before Ukraine blew up, people have been talking of capital flight, the 1997 Asian experience and possible capital controls. I always think that when one starts discussing capital controls, it’s too late. Just this week, someone in a developing country bank Treasury department asked me how his firm should treat, for stability purposes, a deposit of USD placed with it by a foreign high-net worth individual. I suggested that he should expect it to be withdrawn at the merest hint of trouble - not just in his region, but anywhere in the world.

There’s no long-term substitute for organic growth. Recipients of foreign capital, take note.


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Tags: Asian crash , capital controls , developing economies , eastern Europe , emerging markets , Eugene Fama , geo-politics , Harry Markowitz , Miller and Modigliani , organic growth , Putin , riot , Russia , Ukraine
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