Morgan Stanley now views emerging market currencies as risky. This shift is mainly due to China’s weak economic performance.
The bank joins others in cutting China’s 2023 growth forecasts. These moves come after a series of disappointing data and weak financial stimuli.
The yuan has lost almost 6% against the dollar this year. Beijing’s efforts to support the currency haven’t been enough.
Asian currencies like the Singapore dollar and Thai baht are more exposed. On the other hand, the Indian rupee and Turkish lira may be safer, says the bank.
Panama, Zambia, Angola, and Ecuador face bigger risks in terms of sovereign debt. Their bonds and trade links are sensitive to the yuan’s performance.
Morgan Stanley’s team sees no quick turnaround in sentiment for China. They cite issues like low business confidence and high debt.
Goldman Sachs also expects the yuan to keep falling. Weak exports and low domestic spending are the main reasons.
However, they believe China’s central bank will slow the yuan’s fall.
Market concerns focus on possible capital outflows due to the yuan’s decline. But China’s high reserves and banking assets ease these worries.
The country’s central bank also restricts money from leaving too quickly.
Emerging Market Currencies
Emerging market currencies have seen ups and downs over the years. Historically, they often follow the economic trends of major players like the U.S. and China.
China’s economy has been a global powerhouse for decades. But in recent years, concerns about its growth rate have emerged.
The yuan’s value often serves as a global economic indicator. A weaker yuan can signal trouble for emerging markets.
This is due to China’s role as a major trade partner for many countries. The 2008 financial crisis is a case in point.
During that time, a drop in the yuan led to broader market instability.