A Greek exit from the euro zone could lead emerging market equities to retest the lows reached during the Lehman crisis in 2008, as investors turn risk averse, pulling money out, strategists tell CNBC.
“As risk appetite falls and portfolio flows accelerate, we expect to see $25 billion in outflows over the second and third quarter of this year. Over 2008, the year of Lehman’s bankruptcy, $51 billion exited emerging markets,” Standard Chartered’s Clive McDonnell, Head of Equity Strategy said.
“As a home bias emerges, money will flow back to the U.S. in particular, but Europe as well,” he added.
The risk of a Greek exit is rising as the June 17 elections near, says McDonnell, who expects the indebted nation to leave the euro zone in the next three months.
“We anticipate a 25-59 percent retracement across the emerging market equity universe, with high-beta markets including Russia and Indonesia witnessing larger market losses than more defensive markets such as Malaysia,” he said, adding that the sharp selloff in emerging markets could last six months.
Clay Carter, Head of International Equities, Perennial Investment Partners, says in the worst-case scenario of a Greece exit, “Asian markets would be looking like they did in 2008.”
Carter agrees that smaller and less liquid markets including resource-focused Indonesia and export-driven Thailand would be badly hit as global risk appetite wanes.
“If you have all sellers and no buyers, smaller markets will get hard hit. Cyclical markets like Indonesia are seen as a proxy for global growth,” he said.
John Woods, CIO at Citi Private Bank agrees the impact of a Greece exit - which he forecasts will occur in January 2013 - on Asian markets could be severe, pointing to heavy outflows from Asia seen in recent weeks.
“We are already seeing capital outflows from Asia. This month Asian markets have sold down more than double that of Europe. There is a clear outflow effect on markets,” Woods said.
McDonnell expects the trend of developed market outperformance to continue this year on elevated risk aversion. “We expect emerging markets to suffer disproportionately relative to developed markets, with the trend of developed market outperformance to continue,” he said.