Emerging markets aren’t a bubble

By Felix Salmon
December 4, 2009
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Yesterday was the EMTA annual meeting, complete with its venerable and always interesting panel of buy-siders. My favorite is always Hari Hariharan of NWI managment: when asked what his favorite trade is, he never says something simple like “long Brazil”. Instead, it’s invariably a complex relative-value trade: this year he said that “a one year forward 2s-5s steepener in Korea could be an offsetting trade to receiving front-end Mexico”. You’re welcome.

Hari’s a smart and insightful guy, though, he’s not (just) a nerdy quant. When asked whether we were in an emerging-markets bubble, he pointed out that although property prices in Hong Kong are hitting insane levels in the region of $9,000 a square foot, those prices are being paid in cash, and banks aren’t lending against those values. And without leverage, of course, there’s a limit to how much harm a bubble can cause.

Similarly, I get the feeling that for all that Brazilian equities have been skyrocketing in dollar terms of late, that doesn’t mean that Brazilian companies have anything like the same access to the equity capital markets that they did before the crash: the primary markets haven’t recovered as well as the secondary markets, and people spending new money are still displaying signs of caution.

What’s more, in spread terms, emerging markets aren’t looking particularly bubbly, at least by 2007 standards when the EMBI+ index got as tight as 153bp over Treasuries. Right now, it’s 317bp over. In yield terms, however, things are much closer: 6.51% now (or yesterday, anyway, when the panel was going on and before the jobs report came out) compared to 6.37% at the low in in June 2007.

Mark Dow, of Pharo management, added that right now it’s easy to see bubbles everywhere, since we’re still so burned from the bursting of the last one. It’s a good point: while emerging-market assets may or may not be overpriced right now, it’s probably not particularly helpful to worry about bubbles. That said, everybody was a bit worried about the tens of billions of dollars flowing into Brazil from Japanese toushin funds: they’re not good for Brazil, and they’re unlikely to work out very well for Mrs Watanabe, either.

So although there’s bound to be some sort of correction in Brazil and other emerging markets sooner or later, that doesn’t mean they’re currently in a bubble. It just means that traders are making lots of money on the momentum trade right now, which isn’t the same thing at all.


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I don’t know if this is any kind of accurate way to judge, given all the other factors (taxes especially) but as a Sao Paulo resident who frequently travels to New York, it seems very strange to me that basic supplies (everything from toothpaste to underwear and restaurant meals) are significantly cheaper in New York.

Might that not be some kind of sign that the currency at least is in a bubble?

Posted by expatsp | Report as abusive

> without leverage, of course, there’s a limit to how much harm a bubble can cause

the purchase isn’t levered, but who’s to say the purchaser isn’t?

Posted by q_is_too_short | Report as abusive

I don’t think the world economy since 2007 has produced lots of more commodities, houses, gold, silver…at all. Bubbles seem to have been created if there’s too much supply. We all know that there’s been a huge amount of fiat money printed out-of-the-thin air everywhere in the world and pumped into the global financial system since. Amazingly these currency bubbles are yet to bust.

There may be lots of bubbles in the future in the world economy, but not now and not after the fiat currency bubbles bust.

Posted by Paradissa | Report as abusive

Sorry I mean only after the fiat currency bubbles bust

Posted by Paradissa | Report as abusive