“With the bloom coming off the emerging markets rose, one economic model has drawn a circle around two countries that stand the greatest risk of falling into a crisis.
David Rees, emerging markets economist at Capital Economics, said the firm has developed five criteria to identify whether a country’s economy has overheated to the point where it is threatening to develop into a full-scale problem.
The good news is that the Capital model finds no country in “immediate threat of crisis.”
But the bad news is that at least two countries are tilting in that direction and could pose danger to investors.
Rees identifies the endangered duo as Turkey and Venezuela.
Turkey’s stock market has surged 7.3 percent in 2013 and is up 42 percent over the past 12 months. The country outperformed virtually all other emerging markets in 2012 as it modernizes its economy and pushes pro-growth programs.
Venezuela’s markets tell an even more robust story, with the Caracas exchange booming 37 percent this year and more than 200 percent over the past 12 months. While some feared the rally might falter due to political upheaval after President Hugo Chavez’s death, the market has gone on its merry way.
Despite the powerful gains, Rees advises investors to watch five factors: Growing current account deficits; rapid credit expansion; surging short-term external debt; bubbling stock market prices (50 percent is considered a red flag); and large growth in real exchange rates…..”
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