The third quarter of 2011 showed what can go wrong in emerging marketsas stocks in the sector fell 23 percent amid a global equity selloff. While EM bears aren’t predicting another full-scale downturn, they expect trouble for countries linked to the euro zone and those dependent on exports.
The ongoing debt issues in Greece and southern Europe continue to obscure the outlook for emerging market countries of peripheral Europe.
“Certain parts of Eastern Europe are quite high-risk,’’ says James Donald, head of emerging markets at Lazard Asset Management.
Market watchers expect Hungary, Poland and the Czech Republic, countries reliant on trade with a weakened euro zone, to suffer until the continent resumes normal economic growth.
Hungary is in the worst shape with spiraling consumer debt, currency weakness and questionable government austerity policies, with certain industries being taxed to pay for fiscal programs.
The ability of exchange traded fundsl ike Market Vectors Poland and iShares MSCI Austria — Austria is a major lender to Hungary — to be shorted makes them a useful tool to gain from such weakness.
The uncertainty of government involvement also makes Russia a less investor-friendly country. “Russia is tricky,’’ says Ingrid Baker, portfolio manager of the Invesco Emerging Markets Equity Fund. “ It’s extremely cheap [from a valuation standpoint] but the government is putting a hand in the economy, particularly in oil.”
Energy companies in Argentina are also controlled by the government, while the economy is being held back by a tight money supply.
Should exports to China and other rapidly growing EM nations slow, other South American commodityproducers will also suffer.