According to the news report by CNBC, the US stock market is on its way to delivering above average growth this year. However, the scenario is not as rosy for the rest of world. 2018 has been a pretty rough year for stock markets across the world so far.
The S&P 500 Index has gained more than 6% for the year so far and is less than 1% from a record high. In contrast the iShares MSCI China ETF, managed by asset management giant Blackrock, is down by more than 12% for the year. The iShares MSCI China ETF tracks the results of indices of country-specific equities.
Some analysts have defended China’s poor performance on the fears of slower economic growth which have impacted share prices of companies there. However, data shows that it is not only Shanghai and Hong Kong that have shown poor performances this year.
Raymond James’ chief economist stated that one of the biggest financial news stories for 2018 is how much pressure emerging markets have been under. He explained that a lot of the emerging markets have very high debt levels, because of which they get charged higher interest rates, which in turn puts more pressure on them.
Ever since the US Federal Reserve Bank increased interest rates, the value of the dollar has gradually increased against a large number of currencies. If the interest rates in a country are higher, then it increases the value of that country’s currency. This attracts foreigners as they wish to take advantage of the better yields.
On the other hand, when the dollar is weak, emerging markets find pressure easing up as it becomes easier to pay off US denominated debts with the revenues generated in the local currencies. A strong dollar, will of course, put more pressure on emerging markets as investors move back to the greenback.
The 2018 downturn in emerging market stocks is a 180 degree turnaround for Wall Street, which spent most of last year investing heavily in those markets. In the year before the S&P 500 Index hit its all-time high, Wall Street had put in over $6 billion into the iShares MSCI Emerging Markets Fund.
In fact, iShares MSCI Emerging Markets ETF saw investments to the tune of $2.3 billion just a month before the sell-offs began. Sadly, the ETF then dropped down into a bear market in the middle of this week after it plunged more than 20% from its highs in January this year. Investors have pulled out more than $7.2 billion since then.
Across the continent, in Turkey, the political drama continues to worse, which has led the Turkish Lira plunging 14% on Friday, leading to increased credit concerns as this emerging market’s currency also weakened massively against the US dollar.
It is not only emerging markets that are performing badly. Developed markets are also down. British equities are down by 6.9% for the year. German stocks have fallen 11.6% so far, and French shares are down by 3.9% for 2018. Scott Brown from Raymond James stated that while investors are not too concerned about the developed countries’ credit yet, the aggressive policies in trade being adopted by Trump’s administration is making things worse.
Scott stated that these trade policies were negative and were having an impact on global tariffs. Worse, it was creating an atmosphere of uncertainty, which was making business more cautious about investments or spending money.
While the US dollar did fall about 0.3% on Friday to 96.32, it still is 8% higher for the year so far.