A story told in the Bank of England goes like this. Shortly after the fall of the Berlin Wall, a group of Russian central bankers with solid grounding in Marxist economics came to London for a training course at the BoE. They patiently absorbed the theoretical run-down of supply and demand curves and how prices were determined, and then asked “But who sets the price?” A world without a state official with a clipboard announcing the cost of everything was unthinkable. Eventually the exasperated BoE economists took them on a trip to Smithfield meat market in the City of London to see the magic in action.
After the Wall came down in 1989 – triggered by a single unguarded remark by an East German Politburo member in a press conference – the speed and size of changes in the economies of central and east European (CEE) and the former Soviet Union (FSU) were unprecedented since the Second World War. Twenty-five years later, with currency crises wracking Ukraine and Russia, and FSU economies like Belarus and Moldova struggling to emerge from the Soviet era, the dispersion of performance has been dramatic. Read more
“If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.”
For about two weeks in late October, it seemed as if these optimistic words from Calvin Coolidge, the former US president, might have encapsulated the mindset of emerging market (EM) investors.
But the late October rally in EM financial assets has now stalled. Investors are relinquishing hopes that market troubles may turn out to be mere phantoms and focusing again on the very real problems coming their way. Four of the most intractable are set out below. Read more
Two central banks surprised the world last week with unexpected hikes in interest rates in the face of panicky financial markets. Raising rates a startling 150 basis points, the Central Bank of Russia was reacting sharply to yet another week of runs on the rouble. (It fell further this week nonetheless.)
The other, the Central Bank of Brazil, increased the cost of borrowing by a more modest 25 basis points. It seemed to be attempting to re-establish its independence credentials after the previous weekend’s presidential elections and subsequent worries that economic policy would tend towards the populist and the inflationary.
Yet just as with the advanced economies’ central banks – the Bank of Japan ramping up quantitative easing just as the Fed withdraws – monetary policy has diverged rather than unified in the big emerging economies. Read more
By Mark Malloch Brown, former United Nations Deputy Secretary General.
The conventional wisdom behind the renegotiation of the Millennium Development Goals (MDGs) – eight targets for reducing poverty and its attendant woes that were agreed by all United Nations members in 2000 – is that there were not enough of them and that they were too simple. So a UN industry has developed to write a lot more of them.
As one of the original drafters, my view is the contrary. It is not the goals that need changing (although they can certainly be improved at the margins) but rather the vision of development that lies behind them that needs reworking. And indeed adding goals risks detracting from the successful single-issue global campaigns – such as child mortality,which has halved globally since 1990 – that developed around them. Read more
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. Read more
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? Read more
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. Read more
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. Read more
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. Read more
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. Read more
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. Read more
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. Read more
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. Read more