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The sector is suffering from a resurgent dollar, slowing growth, a sharp oil price drop and Western sanctions on Russia, triggered by Moscow’s perceived role in the Ukraine crisis.
With US interest rates set to rise, the dollar is likely to be on the front foot in 2015 as well, potentially deterring funds from emerging market investments.
Emerging equities have fallen 4.5% this year while sovereign dollar bond yield spreads have widened around 75 basis points to 400 bps over US Treasuries.
Chinese equities however hit five-year highs to end 2014 up 50%, sustained largely by hopes that authorities will find ways to stimulate a slowing economy.
On the other end of the spectrum, Russian dollar-denominated stocks lost 45%, 10-year local yields doubled to 14 percent and dollar bond spreads jumped 350 bps.
“From the headlines, it seems as though it was all about Russia this year but actually there was little spillover into the rest of EM,” said Lars Christensen, Chief Emerging Markets Analyst at Danske Bank.
But though emerging markets felt little contagion from Russia, they failed to benefit from gains on U.S. Treasuries and Wall Street, Christensen noted. “China was a major worry, which has not gone away. We may be moving from cyclical concerns to trend growth concerns,” he added.
The yuan posted its first big annual loss since 2005, falling 2.4%. The rouble was the worst performing currency, down 43%.
Currencies of commodity exporters Malaysia, Brazil and Mexico have fallen 6-11%, but dollar gains also hurt others such as the rupee and lira.
“We expect a period of extended dollar strength, which will expose fragile emerging markets significantly in (first half) 2015,” Traditional Analytics said, highlighting the lira and rand as the most vulnerable.
Saudi stocks fell 5 percent on news King Abdullah had been admitted to hospital. Oil’s tumble has pushed the Saudi and Dubai bourses 25% this quarter.
Concerns about the asset class are reflected in investment flows data, with the Institute of International Finance estimating that $11.5 billion had fled emerging markets in December, the biggest outflow since June 2013.
