Every year, there is debate at Davos about what is hot – and what is decidedly not. This year, the emerging markets are definitely in the second camp.
Never mind the fact that the streets of Davos are full of cheery posters proclaiming the joys of Malaysia, India or Brazil – or that Nigerian food was being served to Davos delegates at lunch (complete with snail stew.) Also ignore the determinedly upbeat messages emanating from a host of officials from the BRICs nations.
Behind the chirpy smiles, a new mood of anxiety is stalking the emerging markets delegations, amplified by the recent dramas around Argentina. And that marks a stark contrast to recent years, when the emerging markets were regarded as the new saviours of global growth – and their leaders strutted around the Davos corridors with pride.
Is there anything those beleaguered emerging markets leaders can do to become “hot” once again? This is an issue the South African delegation has been openly discussing in the mountains: on Wednesday, Pravin Gordhan, its finance minister, suddenly convened a meeting of several dozen South African business leaders in a hotel halfway up a mountain, to discuss why sentiment has changed and what the country could do to prevent a “negative spiral” developing in the markets.
This unusual gathering (which I addressed) featured plenty of admirably frank debate about the country’s domestic challenges. There were also the inevitable complaints that international investors – and hedge funds – were being unfair by selling emerging market assets. “They don’t understand us!” the complaint went.
But in reality there is relatively little countries such as South Africa can do to make investors really fall in love again, anytime soon. For the real problem with EM right now is not just the “taper” threat; instead it is a perception that emerging markets have been so pampered by a decade of heady capital inflows they have become hooked on cheap credit, while backsliding badly on structural reform.
And if there is a full scale retrenchment, this could cause asset prices to swing particularly sharply given the low levels of liquidity in some corners of the market. “A decade long bull market has come to an end,” an official from a large hedge fund told me. Or as another echoed: “There is far too much denial going on.”
In truth, that charge may not be fair as South Africa is concerned: the fact that Minister Gordhan suddenly convened the meeting in Davos shows that he is at least trying to listen to investors. But his approach is something of an exception: among the other delegations a mood of bluster and finger-pointing is afoot. Expect to hear plenty more of this, if the market sell off intensifies.