The burning question for many emerging markets investors is: “What will happen next in Russia?” Looking at past emerging markets crises for answers provides both good news and bad. The good news is that following what is usually a painful adjustment process, countries that have experienced financial dislocation typically emerge to regain economic competitiveness. Ultimately investor confidence is restored and the countries regain rating agencies’ approval. Unfortunately the good news pretty much ends there.
The history of past emerging markets crises provides grim detail of what usually happens during the downturn:
risk premia typically reach extremely high levels and the yield curve becomes steeply inverse, market volatility increases and the currency comes under pressure.
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