ETX Capital’s CEO, Andrew Edwards commenting on this week’s aggressive sell-off in Emerging Markets: “Fears over a reduction in global liquidity as central banks scale back easing measures sends emerging markets in a rout with slowing global growth adding to the malaise. EM’s have been the biggest beneficiaries of loose global central bank money over the years; central banks around the world have pumped in $12trillion of extra liquidity since the financial crisis of 2008, preventing a systemic risk in the market. Stock indices across in developed countries have reached multi-year highs on the back of this easy money but it may all be coming to an end and investors have responded by dumping risky assets in favour of safe havens provided by core government bonds such as the German and UK bonds. Now, we all know emerging markets are high risk/high return but in the face of these two drivers [reduced liquidity/slowing growth], investors are pulling out their cash and parking it into investments which at present offer lower risk than EMs. For the biggest developed market, the Fed’s plan to taper QE is driven by a sustainable uptick in the US economy which is currently growing at an annualized GDP rate of 2.5% in 2013 while China’s GDP is projected to slow around 7.2% to 7.5% from 8% this year, projected by analysts last year. The contrast here has lead to the investment case for EMs to diminish and the case for developed markets turns more attractive. Furthermore, let’s look at the current situation in the EM space; of course, China’s slowdown has been the trigger, sending shockwaves to the rest of the EM space. India’s economy is stalling on slowing demand for exports, Australia’s economy is suffering from a significant slowdown on the back of China capping its buying spree of metals which Australia was the one of the biggest beneficiaries followed by South Africa. Mining companies are having to cut production costs due to the lack of demand, leading to closure of mines as capital expenditure becomes too expensive which has lead to job cuts. That has seen the flare-up of tensions in South Africa’s labour market which could trigger a credit rating downgrade. And, Turkey’s political situation has become unstable following recent clashes between the police and protestors, undermining the country’s economic prospects as investors grow uneasy of investing in a country that comes with heightened political risk. Indeed, the World Bank cut 2013 growth forecasts for Turkey yesterday and the growth forecasts for the global economy on the whole, now expecting growth of 2.2% in 2013 from 2.4% forecasted earlier this year. So no wonder investors are falling out of love with the EM space; let’s look at price-action this week in the EM space which has been extremely volatile; The South African Rand and Brazilian Real hit four-year lows against the US dollar, while the Turkish Lira continues to be underpinned by political uncertainty. Aussie dollar continues its downward bias and the Indian rupee fell to a record-low. The FTSE Emerging Markets index has plunged more than 10% since it May peak and commodity rich currencies are off around 20%. EM bonds also suffering with the JPMorgan EMBI Global index of hard currency bonds plunging 7.4% on Tuesday this week from its peak in early May while the corresponding local currency bonds index declined by nearly 10%. So, how should investors play the recent outflow of capital from EMs? Well, any reduction by the Fed in the pace of buying asset purchases will be based on a US economic recovery, which raises the investment profile for developed markets. S&P ratings this week upgraded their outlook of the US economy to stable from negative. If we continue to see a spate of strong US economic data, particularly further improvements in the labour, housing and manufacturing facets of the economy, we are likely to see funds flow from the EM space into assets geared toward a US recovery. These include the US dollar, US equities [domestic plays over international plays] and global corporates with heavy exposure to the US market – industrials, consumer discretionary companies, food and beverage, transport and logistics. This should in turn favour the European recovery as a handful of large-cap leading European companies have operations in the US, which instantly raises their investment profile. Also, a euro zone recovery this year isn’t out of the question either; sure the region remains in a recession but investors remain hopeful the ECB will have no choice but to stimulate the economy, helping the core to pick up momentum. Additionally, it seems like much of the sovereign default fears have been put to bed after the crisis in Cyprus, although this week, we have had mild concerns about Greece. That said, it’s not out of the question that bullish traders will be betting on a euro zone economy by the end of 2013 and early 2014, with the US economic boom lending the support. For EMs – the end of QE may be causing panic right now but once the US economy picks up momentum, EM nations are sure to benefit, particularly export-oriented countries in Asia. So, this recent selloff across the EM space is very much dependent on recovering developed markets providing a big boost. For that reason, it may be unwise to dump EM assets so fast and instead hold back until the US recovery bears fruit.”
Posted on: Thu, 13 Jun 2013 11:02:36 +0000
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