EM fundamentals are not fixed

Emerging market fundamentals are not fixed

Textbook economics holds that free capital mobility is a source of stability, because it allows international investors to diversify risk and pursue the most profitable investment opportunities.

Yet real world experience suggests the vagaries of international capital flows can impart a huge amount of instability. The prime reason for this is that self-fulfilling expectations can get stuck on an explosive path and, when they do, they have the power to alter the underlying fundamentals.  When developed market expected returns were very low due to sluggish growth and easy policy rates, investors flocked towards emerging markets in search of higher returns. This pushed up EM asset prices (including the exchange rate) and led to a huge increase in domestic credit growth in various...