30th January 2014
So Federal Reserve tapering has begun in earnest. On this trajectory, cutting the amount of bond purchases by $10bn at each or at least most of the eight Fed meetings, and the US bond buying programme could be over around the end of the year.
Of course the Fed would still hold a huge amount of paper. Likewise the Bank of England may have stopped active quantitative easing, but it still holds a huge quantity of securities while Japan is intent on boldly injecting more liquidity into the system and, perhaps, the ECB will follow suit depending on inflation.
Such facts have not, however, stopped the sense of crisis afflicting many emerging markets.
Indeed, it feels as if we have witnessed a phoney war as tapering was first trailed last year, a phoney peace as the first reduction was greeted with relative calm because the $10bn reduction was a smaller amount than first feared. Now markets know the direction of travel and have reacted characteristically – by panicking.
The last few weeks have seen a new sense of nervousness stalk the world. Argentina, a market few people care about – apart from Argentinians – has arguably suffered most. It is interesting to see statements issued by commentators and indeed Latin American fund managers discussing that rather unhappy country in some detail, before making it clear they have no holdings there.
But other more significant nations have had their share of troubles not least Turkey. Last night, the Turkish lira had weakened to 2.3 against the dollar from around 2.25, even after the central bank delivered a bumper rate hike to 12pc from 7.75pc.
There are also concerns about Japanese and Chinese growth too. We have seen in the last 24 hours a flight to supposedly safe havens such as Swiss and German bonds. The hot global money is moving.
So what about money that isn’t quite so hot i.e. most retail investors’ money? Well the experts are still saying stick with EM. In recent days we have seen Psigma’s CIO Tom Becket say that despite the problems, it makes sense to have an EM allocation, though he adds that the one thing emerging markets have in common is a lower pace of growth. Political instability, say that afflicting Turkey or more significantly Thailand, is not universal.
Franklin Templeton’s EM investment guru Mark Mobius told Bloomberg this week that “given the fact that emerging markets are still growing fast, given that they have low debt-to-GDP ratios, given that they have high foreign-exchange reserves, we believe that money will be flowing back in again to emerging markets”.
Ashmore’s outspoken head of research Jan Dehn has been making that case even more forcefully in recent months saying that the crisis really ought to be in developed markets.
“We know that markets are still extremely bad at valuing the EM assets class during periods of general policy uncertainty,” he said this week.
Yet even this EM advocate suggested it would be unwise to blindly buy all emerging market credit in simple contrarian terms. An investor needs to be selective he added.
And Hargreaves Lansdown also has a view. Adrian Lowcock, senior investment manager, said: “Tapering by the US Federal Reserve is causing a sell-off in emerging market currencies and loses in stock markets as investors switch to safer assets classes. The recent sell-off acts as a reminder that emerging markets can be volatile and are only suitable for long term investors.”
“Sell-offs create opportunities. Emerging markets are beginning to look cheap and many companies are attractively valued. However sentiment towards the asset class remains negative and it could be a long while before we see a recovery. Timing markets can be extremely difficult and catching the bottom is almost impossible. We recommend investors focus on the long term. One way to take advantage of the volatility is to drip feed investment into emerging markets through monthly savings.”
That is one way to approach things certainly. Clearly it is best to buy when valuations are cheap. All told, this ‘crisis’ should be an opportunity. It is just that for some investors it may seem like catching a falling knife.