It’s easy to get the impression from the media that a new emerging market crisis is upon us. I wouldn’t rule it out, but so far what we’ve seen barely counts as a crisis even in countries such as Turkey, hit the hardest.
Turkey is having some serious political problems and this week hiked overnight interest rates from 7.75 to 12 per cent at a midnight emergency meeting. It looks bad, but in the context of Turkey’s history, this is mere noise. Turkey’s last coup was in 1997 – the “postmodern coup” – and there had been one each decade since 1960. The unusual thing is that the military went throughout the 2000s without taking charge.
Here’s the long view on Turkish interest rates (note this is the overnight borrowing rate, the longest-running of the multiple Turkish rates; it is no longer the main rate, but was more than doubled from 3.5 to 8 per cent this week):
While the US Treasury bond sell-off goes on, the market’s sorting of emerging markets is brutal. One factor matters above all others: does the country have a current account surplus or deficit? In other words, does it need to attract foreign capital or not?
The following chart was produced by John Lomax, emerging market equity strategist at HSBC. Since tapering talk began in May, it shows that emerging markets have been bifurcated. Those with a surplus prosper, those with a deficit sell off. This is how shares in the two classes of countries have performed this year, relative to the MSCI emerging markets index: Read more
Value investors are getting excited about emerging markets again after their terrible performance over the past few months.
The problem, as Arjun Divecha, chairman of Boston’s GMO, says, is that mostly what’s cheap is commodity-related stocks set to suffer from the slowdown of demand in China. Domestically-oriented companies are down, but aren’t that cheap.
There are a couple of really cheap areas, though. He points to Russian oil shares, and Chinese banks.
Both have horrible fundamentals. Russia is stuck between recession-hit Europe and slowing China, and has some of the worst corporate governance in the world.
Chinese banks are directly exposed to the slowdown in the country’s economy, are being told to lend less (hurting profitability), face higher funding costs (hurting profitability) and risk the bursting of the credit bubble (which would expose the bad debts from their relaxed lending decisions of the past four years).
Given all that, shares would need to be very very cheap to consider buying them. And they are. Charts showing just how cheap Chinese stocks have become follow after the break. Read more
One of the biggest arguments for emerging markets during their bull market, which started in 2003, was about “decoupling”. The idea was that the emerging markets had now managed to decouple from the developed world, and would be impervious to a recession there. It never worked as it was supposed to, with the arguable exception of a few hectic months at the end of 2008 when China’s stimulus appeared to end. Now, I’d argue, the decoupling has ended, but not in a good way.
I discussed emerging markets with Barclays’ Larry Kantor in a Note video. That included the following chart, which shows that emerging markets have now underperformed the developed world over the last five years, a period that starts roughly with the crisis over Fannie Mae and Freddie Mac in the hot summer of 2008:
Significant EM underperformance when developed markets were performing well is a new experience for many currently operating in the markets. More detail (and charts) after the break. Read more
Those of a bearish inclination have been having a hard time this summer in the west, but China is a whole ‘nother thing. The Shanghai Composite is at another three and a half year low, and has been falling, on and off, since its post-crisis peak in August 2009.
Another way of looking at China is to say it is suffering from the effects of an outrageous policy-induced bubble, which was partially reinflated by the government during the crisis.
This chart shows the Shanghai index against the Nasdaq during the dotcom bubble, both rebased. In green is the S&P 500. The wild swings in China and pure-play dotcoms make the booms and busts of the S&P look tame – but still left those investors able to get their money into Chinese onshore shares (protected by capital controls) better off, at least for the moment.