While attention is firmly focused on the Greek sovereign debt crisis and contagion potential in developed and emerging markets, investors believe there are multiple issues which could impact emerging and developed market performance in the months to come. A significant slowdown in China on inflation and tightening would sharply impact commodities producers and global growth – but benefit major importers like Turkey and India – while the country’s banks look to be at significant risk from a spike in non-performing loans in the next 6-12 months, according to analysts and raters. At the same time while commodity prices remain firm, investors are closely monitoring the impact of food and commodity price inflation in the emerging markets, while also eyeing continued supply chain disruptions due to the crises in Japan which could impact growth in a range a countries. While the MSCI EM Index is flat through the second quarter – after rising 16.4 percent last year and 74.5 percent in 2009 – most investors expect it to end in negative territory for the year.
Analysts are also focused on the health of banking systems in Europe and in the emerging markets, with high credit growth in a number of emerging countries in recent years – notably India, Korea, Turkey and Brazil – seen as a threat on the prospect of rising non-performing loans. In Western Europe, the combination of a potential Greek restructuring/default and release of new stress tests in July has investors concerned that Western European banks will pull lines in central Europe and elsewhere, causing a global slowdown.
Corporate debt spreads have now reversed to the sovereign EMBI at around 315 basis points on the recognition that both PMI and retail sales readings have softened to dent earnings and servicing capacity. The issuance pipeline, which featured a large high-yield segment, has slowed and previously negligible projected default rates may rise. The IMF and World Bank in recent reports flagged the potential for additional troubles in this emerging market specific asset class as official rescue programs diverted to the European crisis may limit the scope for a backstop. Investors and policymakers stress that the successor Fund managing director must be prepared to handle both public and private sector contingencies and workouts as they affect the developed and developing world alike, and that they should have equal access to funding within the same system stability and sustainability/ burden-sharing standards as perceptions harden of preferential treatment for the peripheral Europe cases.