Morgan Stanley's Sharma: Emerging Markets Will Continue to Struggle

Friday, 10 Jan 2014 08:38 AM

By Dan Weil

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Emerging stock markets have opened 2014 on a sour note, and that weak performance is likely to continue, says Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management.

The MSCI Emerging Markets Index of stocks has dropped 2.9 percent so far this month. Investors are reacting to economic weakness and political unrest in these countries.

"Some of the big emerging markets are still going to drag the index down a bit before this thing clears up," Sharma tells Yahoo.

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He sees two major issues weighing on emerging markets this year. First, almost half of all democratic emerging markets are holding elections in 2014, raising the threat of political instability.

Then there's China, "the 800-pound gorilla of the emerging market space," Sharma notes. "The concern is how will they be able to rein in their debt and still achieve a soft landing."

The weakness in emerging markets does carry an advantage for U.S. consumers, he explains.

Emerging markets' economic strength in the last decade created strong demand for commodities, driving up the prices we all had to pay for them. "As these economies cool down, particularly that of China, that's keeping a lid on commodity prices," Sharma said.

Others paint a bleak picture for emerging markets too.

"What we're witnessing is hope being squeezed out of these markets," Michael Shaoul, chief executive of Marketfield Asset Management, tells The Wall Street Journal. "The relative underperformance has become really, really painful."

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