Many emerging equity markets are now in bear market territory, having tumbled by 20% this year. A number of currencies reached historic lows, while external bond spreads widened. Such sell-offs often offer opportunities to investors. But to understand whether the current sell-off represents such an opportunity, it is important to understand the causes behind it.

A less hospitable external environment

The Shanghai stock exchange is down almost 15% this year, shortly after much-touted measures of opening-up to foreign investors.  The Chinese yuan has depreciated. Trade tensions following the announcement of tariffs by the Trump administration continue to escalate.  These developments have taken a toll on other emerging markets, making emerging market equities one of the worst performing asset classes this year. 

As the Q1 earnings season draws to a close, investors were left with a mixed picture. While the S&P 500 earnings per share (EPS) growth was on average 25% with over three quarters of the companies beating analysts’ estimate, the index edged up only 50bps since the start of the season on April 13th.

The reasons behind this inconsistency are multi-fold: