Tag Archives: Emerging markets

Instability dominates emerging markets

Monetary policies in some countries experience a deep change after some years of relax due to the financial and economic crisis. US Federal Reserve is the machine in this movement. The announcement in December that the central bank reduced its debt purchases (broadly known as Quantitative Easing), originally focused to avoid deflation and promote an economic improvement, provoked an earthquake in the emerging markets. Why? Well, there were already signs in August, but these countries are now less attractive as the US bond rate outlook tends to increase.

Emerging markets benefit these years from capital flows from developed countries. Low interest rates and economic crisis in US, Europe and Japan put them in the investors’ focus. But the QE tapering continued in last week’s Federal Reserve meeting activated the alarms. The IMF alerted about a possible turmoil in developing countries, but it was too late: India, Brazil, South Africa and Turkey increased their interest rates to protect their currencies and keep the attractiveness for investors. In the particular case of Turkey, the central bank doubled the rates. However, volatility exploded and bears dominated markets. The following chart, extracted from T-Advisor, showed the five worst markets last week:

Emerging markets: Worst markets last week January 2014

But the effects multiplied and affected the whole world, as we can see in this chart from T-Advisor:

World markets last week January 2014

Possibly, the 1997-98 crisis will not repeat, as emerging markets have other strengths, but instability will be the next months’ market behaviour.

US Federal Reserve will tend surely to continue its tapering in a slow pace, but markets take into account that this year will be the last one with quantitative easing. Dollar will tend to be stronger and US bond will tend to increase. At the other side of the Atlantic Ocean, the ECB will tend to keep a flexible monetary policy, as Mr. Draghi observes some deflation risks. The open question is if the European Central Bank will act surprisingly as it did in November with an unexpected rate cut.

These changes in the world capital flows will have a deep impact in emerging markets. Investors should look for the best information to react immediately and avoid possible losses in their portfolios.

Emerging markets: risk with chances in 2014

Emerging markets Puzzle with Brazil, Russia, India and China flags by T-Advisor

Emerging markets compound an increasing number of countries in the last years. In the beginning, Goldman Sachs pointed them as BRIC (initials of Brazil, Russia, India and China). This successful combination enlarged joining to this group another countries: Indonesia, Korea, Taiwan, South Africa and Turkey. In the markets, they are divided between the “fragile five” (Brazil, India, Indonesia, South Africa and Turkey) and the “fab four” (China, Taiwan, Korea and Russia). The reason to build this both groups is linked to the current account position: deficit for the first ones, surplus for the second ones.

This point is quite important in the current financial situation and conditions investors’ decisions. The “fragile five” will suffer from the tapering begun by the Fed in December. The costs to finance their deficits will increase as the dollar will be more expensive and the US debt will require higher yields. Moreover, these countries will deal with elections in 2014. On the contrary, the tapering decision did not affect the fab four, which represent 50% of the MSCI Emerging Markets index.

What is the best in emerging markets? Just run away? Take the money and say goodbye? Schroders disagree with a pessimistic position about them. As this bank underlines, these countries have solid economic fundamentals and attractive valuations. However, tapering will create uncertainty in some countries, as it was mentioned above. Avoid an exposure to tapering-affected countries and overweight the other group is the point for the British bank.

Russia appears as a specially cheap country for investors, as Alken Asset Management recently stated. The situation is similar in India: low prices open great chances, but it depends on the election results, the economic expansion and the effect of the Fed tapering. In the case of China, the view is driven to sectors that did not outperform in 2013. Possibly, Brazil will suffer at most, as the widening current account deficit will affect the economic outlook, despite the positive impact of the Football World Cup in investment.

Invest in emerging markets is a risky game, but with productive incomes and profits if the right keys are played. In this case, macroeconomics will have a very important role in investors’ decisions.

2014: back to growth… sure?

Growth outlook 2014 US and Eurozone

Economic outlook for 2014, following the main institutions’ projections, is more positive than the years before. The slope upwards is far from being strong, but there is a consensus in some points.

First of all, US will be back to growth, with projections over 2.5% for the GDP next year. The more optimistic is the Federal Reserve, with a perspective between 2.8% and 3.2%. It is not very surprising, as this institution decided yesterday to reduce the quantitative easing programme. The Fed sustained that the economic improvement is “consistent”. The outlook for the OECD is also similar to the Fed. Just the IMF is a bit far, because its last projection was in October, in the days of the Administration shutdown.

Secondly, the Eurozone will have a low growth for 2014. It also surprises that the ECB is the more optimistic (1.1% GDP growth) against the OECD and the IMF, which agreed in this projection in 1.0%. Last monthly bulletin from the ECB stated that the risks for the Eurozone are still on the downside. The central bank underlined the uncertainties in the global money and financial market.

The point is that the general growth pace is still slow. Emerging economies will suffer in 2014 a slower growth and there are doubts about their reaction with a further tapering from the Federal Reserve and the instability in the currency markets. What Japan refers, Abenomics (the economic policy measures developed by Primer Minister Abe) will hit hard in the inflation, as a result of the monetary expansion, but the country will return slightly to growth.

In any case, the main institutions do not close the crisis yet. Although all try to show a more positive tone, the risks are still persistent, mainly in the credit markets and the investment, but also in the consumption, affected by the general uncertainty. Finally, the point in 2014 is still in the monetary policy measures, as all market agents react strongly to every decision and comments from the central banks.