Emerging Markets Hogwash

21 August 2013 --

Today's Financial Times opens (front page) with three articles.  I quote the first lines from each:

Heat is on developing world to raise rates: Turkey's central bank unexpectedly raised rates to buttress its wilting currency as policymakers across the developing world scrambled to stem the turnoil rattling emerging markets [...].

German election race overshadowed by [...] Greek bailout:  The politically toxic subject of financial support for Greece burst into Germany's election campaign yesterday as Wolfgang Schauble, finance minister, acknowledged for te first time that Athems would need a third bailout.

Investment banks hire traders and dealmakers:  Investment banks [...] have started hiring dealmakers and traders in Europe in a sign that recruitment is picking up after a two-year cull in which thousands of bankers lost their jobs.  Recruiters say they are at their busiest since 2010 [...]. 

Our Dutch Financieele Dagblad also opened with a big spread on the emerging markets 'meltdown', with worrying articles on the main countries on the inner pages.  What is all this about, and how can the events sketched above make any sense in synchronisation?

I believe the answer is at once simple and difficult to believe.  Driven by the fears of the US Fed winding-down its multi-year stimulus programmes, global markets appear to expect a rise in US rates and the dollar. Emerging markets, especially in Asia, enjoyed a great run through the spring of this year, but have been overtaken by OECD markets more recently. Glimmers of Euro-recovery are visible, southern-European markets (the "PIGS" not so long ago!) have bounced. Hence the opportunism of investment banks gearing-up for what they hope will be a revival in business in European markets.  But with the Germans distracted by politics and another round of Greek moaning and hand-wringing coming-up, who is really so optimistic?

Is there a massive rotation in asset allocation underway from emerging markets to the US and Europe? Has everyone lost faith in the growth prospects of the likes of Indonesia, Thailand, Turkey, Kenya or Nigeria (let alone the BRICS)?  Since US interest rates are not going up -- the Fed has said this over and over again, and the most recent evidence about the impact of QE is that it is far less inflationary than the pessimists think -- and EM rates are, what are the arguments to beat a path to the NYSE or FTSE?  And if US rates do, after all, start to edge up, how could this possibly be good for OECD equities or corporates generally?

Personally, I believe there is a disconnect between short-term trading views, medium-term likelihoods, and common sense at work presently.  And its still August.  There has never been a period when the medium-term prospects for the interesting emerging markets was better than today.  So perhaps those of us interested in emerging markets should stop reading the papers for a bit and just relax.
 
-- Jan Cherim