Bad apples emerge as free money heads home With the supply of easy money being dried by the US Fed's stimulus tapering, the bad apples among emerging markets are being shown up. Emerging markets experts disagree that the rout playing out in some economies right now points to a repeat of the 1997 crisis but they do concede that frontier economies face a difficult few months ahead. HSBC's Hong Kong-based co-head of Asian economic research Fred Neumann expects the sell-off to be more discriminating as the "bad apples" with large current account deficits and unstable political rule distinguish themselves from economies in better shape. "Emerging markets investors tell to sell everything at the first sign of bad news and then they search for the rubble and buy back in where things aren't as bad as they thought," he said. He said the rout can be traced back to the US Federal Reserve's decision to unwind ultra-stimulatory policy settings as of this month and heightened China fears on the back of subdued growth forecasts, weak manufacturing output and a Chinese trust product which averted default but stoked fears around the integrity of the banking system. "There's still concerns of tapering and Chinese financial health and there's no magic bullet that can fix anything... we're looking probably at a fairly challenging environment for emerging markets investors over the next few months," said Mr Neumann. IMF warning Only last week the International Monetary Fund warned that emerging markets were vulnerable to capital outflows and urged developed nations not to tighten policy too quickly for fear of further flights of capital. TD Securities Singapore-based head of Asia-Pacific research Annette Beacher said there was no avoiding the fact that emerging markets would come under pressure this year with the Fed's unwinding of quantitative easing locked in. "When we were all putting together our 2014 outlook, everyone baked US tapering into our base case," she said. While it un-surprising to her how the beginning of 2014 has panned out, Ms Beacher expressed frustration that fragile markets had seized upon every economic reading coming out of China with a singularly bearish view. I cover China at a very, very high level and unfortunately the problem with China is everyone takes every data point as being significant. For example, she doesn't think the latest China purchasing managers index reading was especially predictive and took the view that if China were to allow a specific credit product or provider to come under stress that showed the People's Bank of China was becoming intolerant of suspect activity. "At some stage the market will be a little bit more selective around which markets they punish," she said. Political play Complicating the situation for policy makers is the role of politics in this new phase of emerging markets tension. "It's tricky, orthodox economics would tell you quickly hike interest rates to reduce pressure on your balance of payments... but if that's mixed with politics then rising interest rates may not be the right approach," Mr Neumann said. Ms Beacher said: "From what I'm reading from my colleagues, delivering interest rates is not politically popular. In the case of emerging markets they're not necessarily distanced from the government of the day.