The bad news: Higher oil prices, more weakness for Chinese equities and a spike in the yen-U.S. dollar exchange rate could lead to further losses for emerging markets, according to Merrill Lynch strategist Michael Hartnett,.
However, these markets are less overbought now than they were when they plunged 26% in May and June of 2006, he said in a research note, adding that investor sentiment for emerging markets is also less exuberant that it was then.
Nonetheless, corrections inflict damage and markets in Latin America, China, South-East Asia and Turkey, where the crowds have gathered, may be the most vulnerable.
Russia, Korea, Taiwan and the Middle East and North Africa region should be less vulnerable, Mr. Harnett said.
“Markets typically stop panicking only once central banks start panicking,” he said, adding that “Central banks probably welcome signs that risk appetite has fallen.”
Mr. Harnett sees little correlation between China’s equity market and its economy, and considers the market pull-back as a “risk reduction event not a recession event.”