By Tomás Guerrero, ESADE Business School
During 2013, frontier markets’ performance was well above emerging markets. The reference index for emerging economies, the MSCI EM, ended 2013 falling by 2.6 per cent, while the benchmark for funds operating in frontier markets, the MSCI FM, gained 26.3 per cent. The BRICS’ stock markets experienced significant declines, with the exception of China, whereas frontier markets became the most profitable in the world.
In the cases of Bulgaria, UAE, Argentina and Kenya gains were above 50 per cent. Currently, this trend continues. So far this year, the MSCI FM has increased 18.5 per cent, while the MSCI EM has posted only a 5.1 per cent increase.
The slowing Chinese economy and unwinding of US quantitative easing have squeezed emerging market bonds. However, Brett Diment at Aberdeen Asset Management sees an opportunity in local currency EM debt, as he explains to FT’s EM editor James Kynge.
By George Magnus
Serial disappointments in emerging country growth rates since 2011 has forced the International Monetary Fund (IMF) to cut its five-year-ahead forecasts for a group of 153 emerging and low-income developing countries on six occasions since late 2011 (see chart).
However, in its latest World Economic Outlook, the IMF again assumes that current disappointments will give way to restored equilibrium growth rates over the next five years. But what if there is no equilibrium and emerging market (EM) growth continues to disappoint?
By Tim Ash, Standard Bank
It has been easy in recent weeks to get carried away with big emerging market (EM) currency movements. A range of them – including the Russian rouble, Turkish lira, Polish zloty, South African rand and Brazilian real – have hit their lowest point this year against the US dollar.
But this is mostly about the dollar’s recovery, the broader US recovery and assumptions that the US Federal Reserve is way ahead of the European Central Bank (ECB) in terms of policy normalisation. Indeed, the ECB seems still to be going the other way, loosening monetary policy; the euro also appears to be on a hiding to nothing.
So who will be the winners and losers from the dollar’s recent ascent?
By Michael Power, Investec Asset Management
“Are we nearly there yet?” Most of us have faced – and in our younger days probably asked – the same question. As with children on long car journeys, this question is also posed by investors who cannot wait for bear markets to be over.
Commodity investors – and recently this has expanded from the metals and coal complexes to include oils – are wondering aloud when their recent ordeal will all be over. The same can be said for investors in those commodity-rich countries, as they survey their currency-ravaged portfolios. And this phenomenon is not confined to emerging markets (EM) – investments in Australia, Canada and even Norway have suffered the same fate.
And so the fall in emerging market currencies continues. Over the past month, the third episode of taper tantrum has pushed exchange rates down almost across the board against the dollar, bringing with it the now familiar round of hand-wringing about the vulnerability of emerging economies.
Once again, however, at least as far as currencies are concerned, the latest bout of weakness falls somewhat short of full taper tantrum catastrophe. The depreciation of emerging market exchange rates looks a lot like a subset of the sharp appreciation of the dollar, which has also shot higher against the yen and the euro, than it does a weakness of the entire asset class.
The US dollar surged again on Wednesday against a basket of emerging market (EM) currencies, adding urgency to the question of which EM countries are most vulnerable to a receding “carry trade”, the multitrillion dollar flow that has swollen domestic debt markets since 2009.
A soaring dollar piles pressure onto EM carry trade investors, who typically borrow dollars at low interest rates in order to buy high yielding EM domestic debt. When the dollar surges, they suffer currency losses that offset their interest rate gains, prompting them to sell.
By Tassos Stassopoulos, Alliance Bernstein
Rapidly ageing societies in developing countries represent important markets for consumer companies. However, it should be understood that vast cohorts of elderly people heading into the sunny uplands of their lives does not necessarily imply a bright future for investors.
It’s easy to overlook the ageing trend in emerging markets. Countries like India and China are home to the world’s youngest populations in terms of size. Yet as birth rates decline and healthcare improves, older people will constitute a growing percentage of the population. In the top 12 emerging markets, the over-65 demographic is growing at an annual rate of approximately 3.7 per cent (see chart) — nearly double the rate in developed countries.
Barring a late turnaround, emerging markets look set for their worst week in 10 months, as nervousness over the dollar’s resurgence and US interest rates overpowered last week’s policy easing from the European Central Bank, fast FT reports.
The FTSE Emerging Index has lost another 0.3 per cent today, its seventh straight day of declines, taking this week’s tumble to 2.8 per cent – the longest run of declines and the biggest weekly drop since November 2013 (see chart).
However, the Frontier 50 Index, made up of recondite bourses in countries like Argentina, Bahrain, Vietnam, Oman and Ghana, rose for a sixth day running on Friday, taking the gauge’s gain this week to 1.6 per cent and the highest level since 2008.
US jobs growth slowed in August, contradicting a host of other data showing strength in the world’s largest economy. Nevertheless, the weak data is unlikely to sway the US Federal Reserve from hiking rates next year, though it is possible that its language may now turn a little less hawkish.
So while US monetary tightening remains in prospect, it makes sense to assess which EM countries have worked hard to shore up their vulnerabilities to prepare for the receding tides of liquidity – and which have failed to do so.
Global institutional investors regard emerging market (EM) equities as the most attractive of all major asset classes, a new survey of 111 institutional investors conducted by ING Investment Management shows.
A year to the month after Morgan Stanley coined the term “fragile five” to denote five large EM economies – Brazil, South Africa, India, Indonesia and Turkey – that were considered vulnerable to financial market turmoil, investors have become seduced by the risk/reward relationship in much of the EM universe.
By Jonathan Fenby, Trusted Sources
There’s nothing like an acronym or a catchy label when it comes to emerging markets. The master alchemist, Jim O’Neill, set the pace with the formulation 13 years ago of the four-nation BRICs (with or without a final capital S for South Africa). Fidelity followed that with the MINT collection of Mexico, Indonesia Nigeria and Turkey constituting MINT.
Then Morgan Stanley chipped in with Fragile Five, which – such are the vagaries of nomenclature – includes five members of the previous two aggregations.
Now, a new and potentially more durable grouping is emerging – even if it does not lead itself to an acronym that trips off the tongue. The best I can come up with is CIMI – or, if you twist it to give Mexico rather than China first place, the marginally more memorable MICI, though that would invite too many columnists to compare them to Disney’s mouse.
Emerging market (EM) economies are rebounding from an export malaise that has marred their fortunes since early 2012 and rendered several of them vulnerable to the tapering of US monetary stimulus.
So, is an EM export boom now once again in prospect?
The answer, say analysts, varies sharply according to which side of a stark dichotomy each emerging market falls. Manufacturing-led exporters, particularly in Asia, are riding a wave of resurgent demand from the US and Europe. But commodity-orientated exporters in Latin America and Africa are hurting from the slow expiration of the commodity supercycle.
By John Calverley, Standard Chartered
Concern over rising inequality has increased in recent years. While inequality has fallen between countries, as rapid economic growth has helped emerging economies catch up with the developed world, there seems little doubt that inequality within countries has risen for most.
Technology is just one factor at play – along with globalisation, taxation and reduced union power – but its effect on economies is a key to understanding how income gaps evolve over time.
Move over multinationals – the locals are coming.
Sound unlikely? Actually not, according to a new study by the Boston Consulting Group. It has identified 50 emerging market companies giving the big boys a run for their money in their own backyards.
These “local dynamos” – like Indian e-commerce company Flipkart, Chinese mobile-phone company Xiaomi, Bank Rakyat of Indonesia, Discovery Health of South Africa or Banorte of Mexico – may not be international names, but they have successfully carved out innovative domestic niches for themselves.