Worsening problems could spread to emerging markets

The risk of a wider crisis in emerging markets could be sparked if Russia’s problems become magnified, according to RMG Wealth Management.

Group chief investment officer Stewart Richardson said there was often “no single trigger” for a wider crisis to take hold, but warned if the country’s problems got out of control it could be a contagion issue.

“Russia is the most obvious example where bond and equity prices are falling and the currency is almost in free fall,” he said.

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“What we have to be aware of is that emerging markets crises sometimes seem to start in one country, but contagion quickly spreads.

“If Russia moves into a full-blown crisis, the risks of a broad emerging markets crisis will increase quickly.”

Mr Richardson added companies such as BlackRock, Pimco and Franklin Templeton dominate areas of the bond markets.

“Also, exchange-traded funds are now significant holders in some bond sectors,” he said.

“If any of these [or all of them] suffer redemptions from their funds, the selling that they need to do to meet redemptions could be enough to cause a general increase in selling pressure in an illiquid environment.

“That may eventually lead to bond prices falling quickly and this may cause more investors to liquidate,” he added.