Davos: More than a trillion dollars of investment flows has fled emerging markets over the past 18 months but the exodus may not even be halfway done, as once-booming economies appear trapped in a slow-bleeding cycle of weak growth and investment.
While developing economies are no stranger to financial crises, with several currency and debt cataclysms infecting all emerging markets in waves over recent decades, leaders gathering for this year's World Economic Forum in Davos in the Swiss Alps are fearful that this episode is much harder to shake off.
Seeded by fears of tighter US credit and a rising dollar, and coming alongside a secular slowdown of China's economy and an implosion of the related commodity "supercycle", there's growing anxiety that there will be no sharp rebound at the end of this downturn to reward investors who braved out the worst moments.
"The global backdrop and the drivers for emerging markets are very different from 2001," David Spegel, head of emerging markets at ICBC Standard Bank said, referring to the time Asia, Russia and Brazil were recovering from the crisis waves of the late-1990s.
"Back then all the stars were aligned for globalisation and emerging markets benefited the most. This time around, we just don't have those multiple catalysts."
The chief catalyst in 2001 was of course China. Its entry to the World Trade Organisation unleashed a decade-long export and investment miracle that propelled its economy from sixth place globally, to the world's second biggest.
Its ascent hauled up much of the developing world, from Latin American exporters of soy and steel to the Asian workshops which became part of its gigantic factory supply chain. But its slowdown is whacking these countries equally hard.
Exports from emerging markets - from Korean cars to Chilean copper - are declining year-on-year at the sharpest rate since the 2008-09 crisis, according to UBS.
Global trade in fact likely grew slower than the world economy for the fourth straight year in 2015, according to the WTO, a United Nations body. That contrasts with previous decades when commerce expanded at least twice as fast as world growth.
The gloomy conclusion some are reaching is that the China effect was possibly a once-in-a-lifetime shift, whose effects are now dissipating forever.
"Rather than expecting emerging markets to mean-revert towards the golden years of 2002-2007, there is a risk that in terms of trade, what we are reverting to is the environment of 1980s," UBS strategist Manik Narain said.
Flight
One feature of the "golden years" was the extraordinary amount of capital that poured into the developing world; according to the Washington DC-based Institute of International Finance net inflows in 2001-2011 totalled nearly $3 trillion.
Some of this is starting to reverse as last year saw the first net capital outflow since 1988, a $540 billion loss, says the IIF which predicts more flight in 2016.
Other forecasters such as JPMorgan reckon nearly a trillion dollars have fled China alone since mid-2014; its central bank reserves alone declined more than $500 billion last year.
Redemptions from emerging stock and bond funds hit a record $60 billion last year, according to fund tracker EPFR Global.
IIF executive director Hung Tran says emerging markets' problems are not just external. They must overcome a key homegrown issue - falling productivity.
Tran estimates productivity, which provides clues on future economic growth, is growing at just 0.9 per cent a year across much of the developing world, a quarter the rate seen before 2007 and not far from richer countries' 0.4 per cent.
"Productivity advantage of EM countries, which is key for attracting capital flows and investment, has collapsed," Tran said. "There is a cycle of diminishing returns on investment."
Slow-burn crisis
There are some bright spots such as India and Mexico. But with China fears on the rise and Brazil and Russia in recession for the second straight year, investment returns across the sector are unlikely to recover soon, many fear.
Emerging stock market performance has lagged developed peers for five years now, and corporate earnings have shrunk for more than four years, Morgan Stanley has calculated.
This is the longest decline in the MSCI equity index's history, MS says, noting the longest prior earnings recession in the asset class was after the 1997 crisis and lasted two years.
Richard House, head of EM debt at Standard Life Investments, notes the strengthening dollar is spooking investors in emerging currency bonds too.
"Fund performance hasn't been good across the industry...Local market funds have been an outflow asset class for a while and that experience is going to impact people's mindset going forward," House said.
The fear of large-scale outflows is clearly on policymakers' minds. To combat such an exodus, emerging economies may have to resort to radical measures such as coordinated securities market interventions, of the kind done in the West after 2008, Mexican central bank head Agustin Carstens has suggested
Ultimately though he said that to boost long-term growth, there was only one solution - tough economic reform.
