Ignore Emerging-Market Rout: This Time (Really) Is Different
(Bloomberg) -- This emerging-market rout may not have much further to go.
Investors from AllianceBernstein LP to Morgan Stanley and UBS Wealth Management say that while the pain developing-nation assets are experiencing isn’t entirely over, the selloff won’t be anywhere near the magnitude seen during the taper tantrum of May 2013.
Back then, emerging-market currencies and bonds slumped for about six weeks as the dollar and U.S. rates rose in response to the Federal Reserve unexpectedly suggesting it would reduce debt purchases. The trigger this time was once again a strengthening greenback and higher U.S. yields. Investors have pulled more than $5.5 billion from bond markets since mid-April, according to the Institute of International Finance.
But emerging-market governments now have stronger buffers, which bodes better for their assets, according to AllianceBernstein, which manages about $550 billion of investments.
“The biggest issue is that current-account balances are in much better shape than they were in 2013,” said Christian Diclementi, an AllianceBernstein money manager in New York. “Generally, emerging markets are much better positioned today to withstand external shocks. We view it as an opportunity to add exposure to countries that are being overly penalized by a movement in the dollar and U.S. rates.”
Nations from Brazil to India to South Africa have reduced their current-accounts deficits in the past five years, while Thailand has turned its shortfall into a surplus of more than 10 percent of gross domestic product. That helps reduce their reliance on foreign investment to plug the gap. Moreover, stable inflation rates and robust growth continue to make their assets attractive, especially for funds looking to diversify from developed markets still offering yields close to historical lows.
Policy makers are also reacting better than in the past, according to Diclementi. Argentina’s move last week to defend the peso by hiking its key interest rate to 40 percent and committing to reducing its fiscal deficit exemplifies that.
“It showed a cohesion and an understanding of what was needed to arrest the negative sentiments that had built up,” Diclementi said. “Policy making in emerging markets is of a higher quality today than four or five years ago.”
There are notable exceptions, Turkey being an obvious one. Investors are put off by its 11 percent inflation, by President Recep Tayyip Erdogan’s coercion of the central bank not to raise interest rates, and by fears that his decision to call a snap election for next month is a power grab.
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“We continue to be quite cautious on Turkey,” said Jean-Charles Sambor, the deputy head of emerging-market fixed income in London at BNP Paribas Asset Management.
But developing currencies as a whole are “massively undervalued” for buyers who have a one- or two-year horizon, he said. “There could be some volatility in the next couple of weeks. Overall, we see that as a buying opportunity.”
So does Morgan Stanley. Its analysts said on Monday that emerging-market bonds and currencies will perform better in the coming weeks and recommended that clients short the euro against the South African rand and Philippine peso.
Not everyone is convinced. Boston-based Eaton Vance Corp., which manages $434 billion, has cut exposure to developing nations because it foresees more volatility, Eric Stein, co-director of global income, said in an interview.
Still, for those that feel the dollar’s climb is unsustainable given a growing fiscal deficit in the U.S., emerging markets look appealing.
“We don’t think this is a 2013 type of scenario,” Alejo Czerwonko, a strategist at UBS Wealth Management in New York, said in an interview with Bloomberg Television on Monday. “We’re thinking of indicators such as current-account positions, much improved from 2013 levels, or real interest rates, a lot higher than they used to be, or foreign-exchange coverage ratios. All these factors taken together are a lot better than in the 2013 taper tantrum.”
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