Jan 28 2014, 11:38am CST | by Forbes
What happened to the consumer growth narrative that everyone loved about emerging markets?
Ah, yes, America and Europe happened to them. Or better yet, their Central Banks. The new emerging markets are the ones supported by QE. The others are boring losers.
Last week’s sell-off in emerging markets (EM) is ultimately about money managers scratching their heads over whether or not countries like Brazil and Russia can manage in a world of higher interest rates. Granted, these are countries that are accustomed to growing with double digit interest rates. But for the last two years of low interest rates, growth has been anemic. Imagine when rates rise. In China’s case, lower interest rates have not stopped that economy from growing less than it has in the past. Moreover, low rates have enticed smaller municipal lenders to make bad loans. Investors look at the EM space today and are either stock picking or keeping their investments in the U.S. and Europe.
The MSCI Emerging Markets index is down 8.11% so far this year. The S&P 500, meanwhile, is down 3% and the MSCI Europe, off to a bad start itself, is still better than EM, down 7.5%.
Still, if you’re a global fund manager, you have to pick your spots or pick a new line of work. Which countries are better off in this environment of taper-talk this year?
“The ending of QE would be problematic, but not disastrous for Russia,” says Kingsmill Bond, chief strategist at Sberbank CIB on Fleet Street in London. “There are maybe 15 to 20 high growth Russian companies that continue to have relatively high levels of volume growth despite the weak GDP.”
And how is Russia doing? Well, if you’re playing it through the Market Vectors Russia (RSX) exchange traded fund, you’re doing worse than if you just gave all your EM cash to the MSCI Emerging Markets (EEM) ETF instead. RSX is down 10.32%. One of Bond’s favorite names, search engine Yandex, is down 13% year-to-date.
On the macro side, December real economy indicators in Russia painted a mixed picture with a noticeable pattern. Retail sales growth slowed to 3.8% yearly from 4.5% last year. Unemployment rose a tad more than expected to 5.6%. Last year’s real wage growth slowed to 1.9% year over year from 4.1%.
But there is hope. This might be as bad as it gets, or famous last words for some.
Jan Denh, a senior strategist for The Ashmore Group in the U.K., said Russia’s economy is likely to face a “gentle cyclical upswing in 2014″ that should allow Russia’s growth rate to double to 3.0% in 2014 from last year’s sluggish 1.5%.
“We think emerging markets are over reacting to Fed tapering and that the reaction has been far too indiscriminate,” says Dehn. “There is some serious dumbing-down going on in financial markets right now when it comes to emerging.”
On Jan. 21, Morgan Stanley's emerging markets guru Ruchir Sharma suggested yet again in The Wall Street Journal that emerging markets were no longer the big growth drivers they once were. Sharma has been arguing for the past two years that many of the big emerging markets in particular would hit the infamous “middle income trap”, and growth would slow as they move out of poverty and into middle class status.
Over the past two years, growth has been no higher in emerging nations than in the U.S. In Brazil and Russia, it’s actually been worse. Convergence has halted across a broad front, and after losing ground for much of the last decade, the U.S. share of global GDP has stabilized since 2011 at 23%, while the share held by emerging markets excluding China has stabilized at 19%, notes Sharma.
“Some of the biggest emerging market stars of the last decade…are now growing at a pace slower than that of the U.S. This trend is unlikely to change in the foreseeable future,” he writes.
Peter Kohli, CEO of emerging and frontier market specialist DMS Funds in Leesport, Pa., said Tuesday that while he thinks Sharma is mostly write about the big emerging markets, India stands out as better positioned for growth. Not only has it been getting clobbered as a portfolio investment for years, but it is the poorest of the BRIC nations. There’s a lot of room for upward mobility, if the government gets it right.
“While a lot of the countries within the emerging markets universe aren’t doing well, India, by default, is,” Kohli says. ”I’ve been advocating (for India). I strongly feel that once the election is over, India should be a part of an investor’s portfolio.” India votes for new members of Parliament in May.
The market is only mildly upbeat about the election, with the Wisdom Tree India (EPI) ETF down 7.16% this year. It’s better than the benchmark MSCI EM, which is saying a lot for India these days. Over the last year, EPI has declined by more than 19%, while the benchmark has fallen by 12.66%.
The days of painting the emerging markets with one brush are over. No one is expecting China’s financial troubles to create some sort of Asian flu. But as any investor with a memory knows, the worst happens when everyone says it will not.
For Dehn at Ashmore Grop, the best bet in Asia is Singapore. Industrial production picked up sharply in December at 6.2% year over year versus the market’s expectation of a decline of 1.4%. Singapore’s economy is also heading higher and the market is now likely to have to revise growth expectations accordingly.
The Singapore Index Fund (EWS) is down 5.62% this month.
Poland is another favorite thanks to better than expected economic data. Retail sales for the month of December picked up strongly from November, rising at a pace of 5.8% year over year versus 3.8% the month before. The retail sales data is consistent with a general upswing in the economy that began last year and which should take real GDP growth in Poland from around 1% in 2013 to about 2.5% in 2014. Unemployment remains a stubborn 13.4%, however.
The iShares MSCI Poland (EPOL) is thinly traded, and down around 5% this month.
Lastly, if you’re a believer in manufacturing returning to the U.S., or in the idea that the U.S. economy has found its legs, then Mexico is really the only place to be in Latin America right now, judging by Dehn’s fairly negative view of Brazil.
Retail sales in Mexico were strong in November after an already strong print in October. In seasonally adjusted terms, Mexico’s retail sales rose 3.1% month over month in November, the last month for data. Like Poland, Mexico is experiencing an economic
upswing and the country may grow three times as fast in 2014, says Dehn.
“The Mexican upswing has three important drivers,” he says. “Strong reforms undertaken last year, a Mexico-specific cyclical upswing, and a marginally faster U.S. growth rate in 2014 compared to last year.”
Sadly, Mexico equity investments have also been a dud. The iShares MSCI Mexico (EWW) ETF is down 7.37%. That’s still beating the benchmark. And like Poland and Singapore it’s even beating Europe. For now, the U.S. remains the equity market of choice for global investors.
See: The EM Crisis Is Not About Tapering – Roubini’s EconoMonitor
Source: Forbes Business
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