Despite Weakness, Emerging Markets Not Dead Yet

Feb 6 2014, 4:32pm CST | by

Emerging markets are doing better than sentiment suggests.

Despite that, Fed tapering from its asset purchasing program this year worries investors. China’s housing bubble and growing concern over a possible credit crisis there aren’t helping. Last month, the Industrial and Commercial Bank of China got support from the government to bailout out a $420 million wealth management product called Credit Equals Gold #1.

“Investors know that every time the Fed reaches an inflection point in policy, there’s some crisis in an emerging market,” says Bryan Carter, a fund manager at Acadian Asset Management in Boston. “What investors forget is how emerging markets have changed over the years. Most of these countries don’t have the probability of default. They don’t care if their currency weakens.”

Investors this year remain focused on the U.S. economy and the European recovery. Japan has taken a backseat and is underperforming some emerging markets in Asia.  And on Asia, investors who used to love a good China bull story, now seem like they cannot get enough of the bear case.

Retail investors have been pouring out of emerging market equity and bond funds, according to fund tracking firm EPFR Global in Cambridge, Mass. Still, even taking a passive, top-down approach to emerging markets, some are beating the very economies investors love.

The iShares MSCI Germany (EWG) exchange traded fund is down 5.26% year-to-date, while the Market Vectors Indonesia (IDX) ETF is up 2.12%. The SPDR S&P 500 (SPY) ETF is down 4.04% YTD, but Market Vectors Vietnam (VNM), Market Vectors Poland (PLND) and iShares MSCI Thailand (THD) are beating it.

Last year’s darling Japan is down 7.2% compared to last year’s BRIC basket case India, which is down 6.01% as measured by Wisdom Tree India Earnings (EPI).

“A slowing Chinese economy and declining emerging market corporate profitability over recent years are all feeding negative sentiment and have led some critics to herald the death of emerging markets. We believe the fundamental investment case for the asset class nevertheless remains intact,” says Devan Kaloo, head of emerging markets for Aberdeen, a $320.6 billion asset manager from the U.K.

The big four emerging markets, known as the BRICs, grew up at a time of high liquidity and massive debt in the advanced economies. Consumers in the U.S. are now deleveraging, buying less Made in China goods, which in turn means China is buying less Made in Brazil iron ore pellets to feed its own development.

Emerging market currencies were gaining on the dollar almost daily. In June 2008, the Brazilian real was worth R$1.55. Today it is worth a much weaker R$2.40. For some countries, cheaper currencies could — in theory — help boost exports, while higher interest rates there slow domestic growth and imports.

“We believe this will eventually lead to an improvement in current account positions, underpinning currencies and allowing interest rates to come back down,” says Kaloo. Investors have been growing wary of deficits in countries like India and Brazil over the past two years, adding to poor investor sentiment.

Moreover, emerging market corporate profitability has declined as companies have had to contend with slower economic growth and margin pressures from rising capital and labor costs. In contrast, developed market companies, particularly in the U.S., have seen profitability hold up as they have taken costs out of their businesses and have implemented significant share buyback programs.

China remains the elephant in the room. Beijing is pursuing interest rate liberalization and consumption-led growth as a means to address the fundamental misallocation of capital, particularly at the municipal level. This has consequences for global and emerging markets growth as China’s economy slows and the nature of its imports change. China will build less. This could pressure jobs. The economy will struggle to grow over 7.5%.

In a worst case scenario, Beijing has the money and the reins to steer the economy wherever it wants. The banking system remains well capitalized despite increases in non-performing loans and a closed capital account gives the authorities greater control of the situation. New leaders, now nearly a year in office, have laid out a number of economic reforms that, if pursued, will provide better investment opportunities in China.

Today, emerging markets make up 40% of the world’s GDP – compared to 14% in 1997 when the Asian crisis started in Thailand, wiped out the so-called Asian Tigers, spread to Russia and saw the end of dollar-pegged currencies in that part of the world.

Times have changed, but investors have not forgotten what the Fed can do to emerging markets.

Many emerging markets now run structural account deficits and therefore have to rely on foreign capital inflows to maintain value of their currencies. Others, like Brazil, have to tap into their foreign currency reserves to save their currency from speculative attacks./>/>

The final point in all this is the dollar,” says Mauro Ratto, head of emerging markets for Pioneer Investments, a $230 billion asset manager in London. “A strong dollar has made life much more difficult for emerging markets. Even now I think the dollar is undervalued,” Ratto says. “I know that is not consensus, but when interest rates rise in the U.S., the dollar will get stronger.”

Even long term global investors worry that a strong dollar means weaker emerging markets.

“Everyone is looking for a big policy movement,” says Carter from Acadian. Wednesday’s European Central Bank announcement that it was keeping interest rates flat was one such movement. A lower rate would have been better news for emerging markets even though the MSCI Emerging Markets Index rose 2% today.

“It is hard to call tops and bottoms. A deliberate and diversified approach is probably the most prudent way to buy in now,” Carter says.

Source: Forbes Business

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Investments pouring in from Singapore: Bengal minister
Singapore, Aug 20 (IANS) Camping here to woo investors, West Bengal Finance Minister Amit Mitra Wednesday said many companies have signed joint ventures and letters of intent promising to pump in at least Rs.1,200 crore in his state.
 
 
111-year-old Japanese officially declared world's oldest man
Tokyo, Aug 20 (IANS/EFE) Sakari Momoi, a 111-year-old Japanese citizen, was Wednesday officially recognised in Tokyo as the oldest man in the world by the Guinness World Records award committee.
 
 
Is your college going kid more active on weekends?
New York, Aug 20 (IANS) Parents always suspect that their college going kids prefer weekends to weekdays. Now there is proof that college graduates are more active on weekends compared to non-college goers.
 
 
How brain can multitask better
Toronto, Aug 20 (IANS) Cooking while having a conversation, watching a movie while browsing the Web, or driving while listening to a radio show - multitasking is an essential skill in our daily lives. Make it better now.
 
 
 

Latest from the Network

Germany to supply arms to Kurdish fighters
Berlin, Aug 20 (IANS) Germany is prepared to supply weapons to Kurds in northern Iraq,announced Foreign Minister Frank-Walter Steinmeier Defence Minister Ursula von der Leyen jointly announced Wednesday Wednesday after...
Read more on Politics Balla
 
PTI agrees for talks with Pakistani government (Third Lead)
Islamabad, Aug 20 (IANS) The Pakistan Tehreek-i-Insaf (PTI) has agreed to talks with the government over alleged rigging of the 2013 general elections, a media report said. Senior PTI leader Shah Mehmood Qureshi told...
Read more on Politics Balla
 
Black Friday 2014 is Less than 100 Days Away
Black Friday 2014 is less than 100 days away. When is Black Friday 2014? Black Friday 2014 is on November 28th. Of course the Black Friday sales start already weeks before the actual Black Friday. Which means the first...
Read more on Black Friday Countdown
 
47 arrested in US town after fresh riots
Washington, Aug 20 (IANS/EFE) Forty-seven people were arrested overnight in Ferguson in the US state of Missouri after protestors hurled bottles at police in fresh outbreak of violence over the shooting death of an...
Read more on Politics Balla
 
Is your deodorant making your armpits smell worse?
New York, Aug 20 (IANS) Deodorants and antiperspirants are being more widely used and advertised than ever before, but did you know that they may actually make you smell worse in the long run? According to a study,...
Read more on Celebrity Balla
 
Indian found dead in Oman
Muscat, Aug 20 (IANS) An Indian national was found dead in his room in Oman, media reported. The victim, 26, who has been identified by his friends as Siby, an automobile spare parts shop salesman from Kerala, was...
Read more on Politics Balla
 
Investments pouring in from Singapore: Bengal minister
Singapore, Aug 20 (IANS) Camping here to woo investors, West Bengal Finance Minister Amit Mitra Wednesday said many companies have signed joint ventures and letters of intent promising to pump in at least Rs.1,200...
Read more on Politics Balla
 
ISAF soldier killed in Afghanistan
Kabul, Aug 20 (IANS) A soldier of the NATO-led International Security Assistance Force (ISAF) was killed in Afghanistan Wednesday. "An International Security Assistance Force service member died of wounds as a result...
Read more on Politics Balla
 
111-year-old Japanese officially declared world's oldest man
Tokyo, Aug 20 (IANS/EFE) Sakari Momoi, a 111-year-old Japanese citizen, was Wednesday officially recognised in Tokyo as the oldest man in the world by the Guinness World Records award committee. Momoi bags the title...
Read more on Politics Balla
 
Is your college going kid more active on weekends?
New York, Aug 20 (IANS) Parents always suspect that their college going kids prefer weekends to weekdays. Now there is proof that college graduates are more active on weekends compared to non-college goers. A study...
Read more on Apple Balla