How much should one worry about the recent sell-off in Emerging Markets? According to Nordea bank, Euroa are could be more affected by Emerging Market events than US.
What we have seen is not the start to a new and general Emerging Markets crisis, as the drivers seem to be more country-specific weaknesses, says Nordea on its research report.
Most of all, Nordea does not expect China as the by far largest Emerging Market to be affected significantly. Domestic growth drivers and policies are much more important in China.
“And as long as that is true, the impact on the US, Japan and the Euro area should be very limited”, Nordea says.
Although the Euro area could be more affected by Emerging Market events than the US.
“First, because the economy is in less good shape and only just starting to recover. And secondly because exposure to troubled countries is somewhat higher. That said, it is not high. As we don’t expect a full-blown Emerging Markets crisis, we consider the risk of the recovery being derailed as low.”
According to Nordea, goods exports account for 20% of the Euro area’s GDP. 30% of exports go to non-euro EU countries, 12 % to the USA and more than 10% combined to other advanced economies like Switzerland and Norway.
“To put things into perspective: the Euro area’s exports to Brazil, India, Turkey and South Africa combined are only about one third as large as exports to the US and UK combined. And private consumption is about three times as large as goods exports.”
If something goes wrong with the Euro area recovery, volatility in Emerging Markets is not the most likely reason, Nordea argues.