Tag Archives: emerging
Emerging Market Rout Threatens Wider Global Economy
The $9 trillion (£5.8 trillion) accumulation of foreign bonds by the rising powers of Asia, Latin America and the emerging world risks going into reverse as one country after another is forced to liquidate holdings to shore up its currency, threatening to inflict a credit shock on the global economy. Fears of Fed tightening have pushed borrowing costs worldwide to levels that could threaten global recovery Photo: AFP By Ambrose Evans-Pritchard 8:38PM BST 22 Aug 2013 India’s rupee and Turkey’s lira both crashed to record lows on Thursday following the US Federal Reserve releasing minutes which signalled a wind-down of quantitative easing as soon as next month. Dilma Rousseff, Brazil’s president, held an emergency meeting on Thursday with her top economic officials to halt the real’s slide after it hit a five-year low against the dollar. The central bank chief, Alexandre Tombini, cancelled his trip to the Fed’s Jackson Hole conclave in order “to monitor market activity” amid reports Brazil is preparing direct intervention to stem capital flight. The country has so far relied on futures contracts to defend the real – disguising the erosion of Brazil’s $374bn reserves – but this has failed to deter speculators. “They are moving currency intervention off balance sheet, but the net position is deteriorating all the time,” said Danske Bank’s Lars Christensen. A string of countries have been burning foreign reserves to defend exchange rates, with holdings down 8pc in Ecuador, 6pc in Kazakhstan and Kuwait, and 5.5pc in Indonesia in July alone. Turkey’s reserves have dropped 15pc this year. “Emerging markets are in the eye of the storm,” said Stephen Jen at SLJ Macro Partners. “Their currencies are in grave danger. These things always overshoot.” It was Fed tightening and a rising dollar that set off Latin America’s crisis in the early 1980s and East Asia’s crisis in the mid-1990s. Both episodes were contained, though not easily. Emerging markets have stronger shock absorbers today and largely borrow in their own currencies, making them less vulnerable to a dollar squeeze. However, they now make up half the world economy and are big enough to set off a crisis in the West. Fears of Fed tightening have pushed borrowing costs worldwide to levels that could threaten global recovery. Yields on 10-year bonds jumped 47 basis points to 12.29pc in Brazil on Thursday, 33 points to 9.72pc in Turkey, and 12 points to 8.4pc in South Africa. There had been hopes that the Fed might delay its tapering of bond purchases, chastened by the jump in long-term rates in the US itself. Ten-year US yields – the world’s benchmark price of money – have soared from 1.6pc to 2.9pc since early May. Hans Redeker from Morgan Stanley said a “negative feedback loop” is taking hold as emerging markets are forced to impose austerity and sell reserves to shore up their currencies, the exact opposite of what happened over the past decade as they built up a vast war chest of US and European bonds. The effect of the reserve build-up by China and others was to compress global bond yields, leading to property bubbles and equity booms in the West. The reversal of this process could be painful. “China sold $20bn of US Treasuries in June and others are doing the same thing. We think this is driving up US yields, and German yields are rising even faster,” said Mr Redeker. “This has major implications for the world. The US may be strong to enough to withstand higher rates, but we are not sure about Europe. Our worry is that a sell-off in reserves may push rates to levels that are unjustified for the global economy as a whole, if it has not happened already.” Sovereign bond strategist Nicolas Spiro said India is “caught between the Scylla of faltering growth and the Charybdis of currency depreciation” as hostile markets start to pick off any country with a large current account deficit. He said India’s central bank is playing with fire by reversing its tightening measures to fend off recession. It has instead set off a full-blown currency crisis that is crippling for companies with dollar debts. India is not alone. A string of countries across the world are grappling with variants of the same problem, forced to pick their poison. Continue reading
Emerging Markets Have Farther To Fall
Kenneth Rapoza , Contributor INVESTING | 8/20/2013 Emerging Markets Have Farther To Fall Emerging market investors worried about this guy: Ben Bernanke and the Federal Reserve’s quantitative easing policy. The market will get a better sense of so-called “tapering” of QE in the FOMC meeting minutes due out on Wednesday. Barclays Capital expects more pain for emerging market equity and bonds, in the meantime. (Image credit: Getty Images via @daylife) The emerging markets have farther to fall and they can lay the blame on Ben Bernanke and the Federal Reserve for their sad-sack performance over the last several days. On Tuesday, the iShares MSCI Emerging Markets Index (EEM) was trading slightly lower following Monday’s 1.86% drop. Will investors buy on the lows? Of course they will. But is this a market ripe for deeper corrections? It sure is, says Barclays BCS +0.34% Capital analyst Koon Chow in London. Risky assets continue to be weighed down by rising rates in the U.S. Ten year Treasury bonds are now yielding 2.83%. In London trading hours this morning, European equities followed the downbeat tone in Asian markets. Meanwhile, high yielding currencies like the Brazilian real are bearing the brunt in the forex markets. And it’s not over yet. This underperformance is likely to continue as the starting point of Fed tapering nears, said Chow in his daily note to clients today. Right now, all eyes are on the Fed Open Market Committee Meeting (FOMC) minutes coming out on Wednesday. The risk associated with the FOMC minutes is whether the Fed has begun discussing a possible change in its threshold rate for unemployment as a means of continuing its QE program. Remember, Bernanke said that he would not step on the break of quantitative easing until unemployment levels were comfortably below 7%, or at the very least, trending downward. Unemployment has been trending downward, but at a slower pace. Any discussion of a move away from waiting for lower unemployment will likely to be viewed as a dovish surprise by the market and may lead to a near-term rally for global bonds. Equities would also bounce. The noticeable lack of a broad dollar rally, despite the sharp moves against high yield currencies, suggests that the market may already be positioning for such an announcement. One of the problems right now with emerging market investing is fund managers are allocating out of them faster than anyone expected. The positioning in emerging markets is still problematic, said Chow, although arguably slightly less negative in equities than in fixed income where global institutional and retail positions are still large. This would suggest that there can be some asymmetry in emerging markets in the months ahead, with greater risks of disruptive moves in fixed income than in equities. Fund managers do not want to be caught holding the same positions, with the same weighting post-QE as they were during QE. This is driving the bulk of the moves in the market these days. Meanwhile, the investment patterns in developed markets seems different. While in emerging, investors have had asset allocation shifts that look more like “risk reduction”, developed market positioning is suggestive of only the early stages of the great rotation out of fixed income to equities, Barclays’ Chow said. The stock of cumulative retail inflows (as opposed to institutional) to developed market equities since early 2009 is actually negative. But institutional investors have not seen such a radical exit from their emerging equity positions. Since the financial crisis, the cumulative position of retail investment into developed market equity mutual funds is still negative ($239 billion less), but it has been offset by large institutional flow into the market ($364 billion), according to Cambridge, Mass. based fund trackers EPFR Global. EFPR Global data also shows that investment outflow from emerging markets is suggestive of broader risk reduction. Investors in retail funds have nearly completed their exit from emerging. They have also reduced their bond holdings by about 25% from multi-year highs in May. The flows from institutional funds, by contrast, have been “stickier”, said Chow, and sold in moderate amounts of both equities and debt since late May. “Although the institutional investors’ decisions should be more long-term focused and therefore naturally less likely to exit, the fact that they have not reduced their positions significantly is an unhelpful positioning technical and they may need to see a further drop in prices to buy,” Chow said. He expects more volatility, and downside risks. Technically speaking, emerging equity looks better than bonds given the considerably more advanced overall exit by both retail and institutional at this point, Chow said. A look at the assets wealthy investors assumed would return the most for their portfolios this year. Continue reading
Emerging Markets Aren’t The Answer To Investors’ Woes
http://www.ft.com/cms/s/0/e59381b4-d4d8-11e2-9302-00144feab7de.html#ixzz2X2Hjr9g5 By Merryn Somerset Webb Economic growth is no guarantee of returns to investors I’ve talked to a good few interesting people in the past week. But two are of particular interest at the moment. The first is David Stockman, author of The Great Deformation, The Corruption of Capitalism in America – a book that has been at the top of the bestseller lists in the US since it came out in April. The second is Dambisa Moyo, the almost impossibly glamorous author of, among other must-reads, How the West Was Lost: Fifty Years of Economic Folly and The Stark Choices Ahead. Both were – and I guess this is obvious – deeply pessimistic on the future of the US in particular. While their arguments are far from identical, they are both convinced that America, with its insistence on using monetary policy to mismanage interest rates and distort markets, along with its badly structured welfare state and low prioritisation of education, has a sad future ahead of it. Stockman was once director of the Office of Management and Budget in the US (under Ronald Reagan) and Moyo was named as one of the 100 most influential people in the world by Time magazine. So it is worth listening to both of them. I also happen to think they are mostly right. Politicians in the west, caught in traps set by their short electoral cycles, have made a nightmare series of bad decisions about public spending, the roles of the state and of course about what we should think of as money and how we should price that money. Then there’s the demographic profiles of western countries, with their growing numbers of older people; economies designed to grow on the back of consumer spending don’t grow much as their populations age and cut back spending. It is hard to see where a return to credit and baby-boomer style economic growth will come from. It is a lot easier to make up a good story about how emerging countries, with their lower debts and younger populations, will see fast economic growth than it is to come up with one about how the US will – although now there is the prospect of energy independence on the horizon, it is clearly getting a tad easier. But it’s a big step from being able to say that one group of countries will grow faster than another in gross domestic product terms to saying that you should expect stock markets in the faster-growing group to outperform the rest. Several studies have shown that this isn’t often true. The opposite very often is. Many explanations have been offered for this, but I suspect it comes down to the way the proceeds of growth are distributed at different stages of growth. When a country is growing fast, wages are most likely to be growing fast too – so more than you might expect goes to labour over capital. Rapid growth also gives companies one-off opportunities to build market share. If they take it, prioritising volume over margins, they won’t make much in the way of profits – possibly for many years. Then there are the many governance issues in emerging markets: state ownership, family-controlled companies, dodgy property rights and so on. These tend to ensure that the majority of the spoils can end up going to the minority of shareholders. If you look at it all like this, surely it would make sense to say that one should pay lower prices for companies based in emerging markets (as is the case in Russia, which I advocated recently), regardless of how fast it looks like those markets might grow. After all, you are taking more risks. There’s likely to be a long wait before the dividends start rolling in, and the longer you have to wait for something the higher the risk that you will never get it. We should pay a premium not for emerging market growth but for the kind of steadily rising profits and dividends we are more likely to get in the west. This is all something to bear in mind as you look at the carnage in emerging markets over the past week. Bonds, equities and currencies have all been clobbered. Investors who bought at high prices to get exposure to economic growth are now finding that there is something worse than paying a premium for the wrong thing. It’s not getting even that thing. So as the cheaper yen makes emerging market exports look less competitive, as China clearly slows down and the debate begins about the end of quantitative easing in the US, they are selling. But here’s one thing to note before you dismiss Asia and Latin America out of hand. One day, all the markets we now think of as emerging will be developed. They’ll turn their minds from all-out economic expansion to profits and at the same time their populations will demand proper governance and the odd dividend. Then their markets will soar. With that in mind, a nice little chart was slipped to me over a pub table by Tim Guinness of Guinness Funds a few months ago. It looks back at Japan’s economic growth and its stock market performance. The latter ran at 10 per cent or so a year from the early 1950s to the 1970s as the country industrialised and invested. In 1955 Japan had 5.2 cars per thousand people. By 1966 that number was 79. In 1970 it was 168. The stock market rose, but not in a particularly spectacular fashion. But around then, the Japanese economy shifted gear down to more like 5 per cent growth as the country entered a later industrial shift to a more consumption-based economy. Look at a chart of the Nikkei and you will see what happened next. It rose steadily throughout the 1970s and went completely nuts in the 1980s. So here’s something to think about. In 2000, China had 4.9 cars per 1,000 people. In 2012 it had 74. By 2016 – or maybe earlier – it should have close to 168. It should also have seen growth fall to 5 per cent or below. A few years before then might be good time to invest. Merryn Somerset Webb is editor in chief of MoneyWeek. The views expressed are personal. Continue reading
