Hartnett says: “In 1998 a series of debt defaults caused a collapse in emerging market assets, emergency easing by the Fed (and IMF) and, in turn, the tech bubble. Today, emerging market pessimism is driven by bond and foreign exchange carnage, EPS recession concerns, and concerns of either a Brazilian debt downgrade or bond defaults in China.
“Emerging market equities are already inexpensive (Google has a larger market cap than MSCI Brazil, Wells Fargo is larger than MSCI India, and Starbucks is larger than MSCI Turkey). So increasingly are emerging market bonds. An event-driven de-rating from current levels could send emerging market assets into ‘close your eyes and buy’ territory. And any G7 policy response to China-driven macro and market contagion could set the stage for liquidity driven investment bubbles in Western markets, as occurred in 1999.
“Emerging market contagion would likely manifest itself through FX markets, first via the Brazilian real, and then via a cessation to Chinese renminbi appreciation, which would indicate policy panic in Beijing and thereafter via the Canadian and Australian dollar.”