Emerging-market stocks took a sharp hit on Thursday, with MSCI's broad index falling 2.3% as a jump in oil prices and a selloff in technology shares combined to rattle investors. The decline pulled the benchmark back toward levels last seen in early August, according to Reuters.
The drop was led by tech-heavy markets in Asia, where chip and internet companies in South Korea, Taiwan, and Hong Kong saw significant losses. This came as oil prices surged to $112 a barrel, adding fresh pressure on economies that rely heavily on energy imports.
Why oil and tech are a double whammy
For many emerging markets, higher oil prices are a direct hit. Countries that import most of their energy face rising costs for fuel, which can push up inflation. That, in turn, makes life harder for central banks, which may need to raise interest rates to keep prices in check—a move that can slow economic growth and weigh on stock valuations.
At the same time, the tech selloff hit markets like South Korea and Taiwan, where technology stocks make up a large share of the index. When investors flee these high-growth sectors, the overall market feels the pain. This is a familiar pattern: Asian tech shares have slid before when global sentiment turns cautious, and this time was no different.
Turkey and Indonesia: market plumbing under the microscope
Beyond the global drivers, investors were also focused on what some call "market plumbing"—the rules and safeguards that ensure trading is fair, transparent, and predictable. Two countries stood out: Turkey and Indonesia.
MSCI, the index provider that many global funds track, has been scrutinizing Turkey over opaque trading practices that contributed to a selloff last month. The concern is that if a market is not seen as "investable"—meaning foreign investors might struggle to trade, settle, or access shares reliably—then benchmark-tracking funds could reduce their exposure to avoid future restrictions or index changes.
Indonesia, meanwhile, is taking steps in the opposite direction. The country announced reforms including sanctions for rule violations and excluding companies where ownership is too concentrated in a few hands. These measures are designed to make the market more attractive to foreign investors. Local stocks rose about 1% for a third straight day, suggesting the reforms are being received positively.
This isn't the first time MSCI has raised concerns about Indonesia. Earlier, MSCI warned it might strip Indonesia's emerging market status if conditions didn't improve. The latest reforms appear aimed at avoiding that outcome.
What it means for investors
For everyday investors, the 2.3% drop in the MSCI emerging markets index is a reminder that these markets can be volatile. But the bigger lesson is about how indexes themselves can influence where money flows.
Indexes aren't just scoreboards; they're road maps for trillions of dollars. When MSCI signals that a market may be less investable, funds that track its benchmarks can trim their positions simply to avoid future restrictions. That can raise the risk premium investors demand for holding local stocks, and it can also put pressure on currencies as portfolio money slows or leaves.
Indonesia's reforms are aimed at the same channel in reverse. Clearer enforcement and a broader tradable share base can reduce frictions, helping its market hold up even when global drivers like oil and tech are moving the overall emerging-markets tape.
For now, the combination of high oil prices and tech weakness is likely to keep emerging markets under pressure. Investors will be watching whether oil stays above $100 and whether tech stocks stabilize. They'll also keep an eye on any further announcements from MSCI regarding Turkey or Indonesia.
As always, it's important to remember that emerging markets offer higher potential returns but come with higher risks. Diversification and a long-term perspective remain key for most investors.
