Money managers under the microscope
from Global Investing:
Emerging markets may yet pay dearly for the sins of their richer cousins. While recent financial crises have been rooted in the United States and euro zone, analysts at Credit Agricole are questioning whether a full-fledged emerging markets crisis could be on the horizon, the first since the series of crashes from Argentina to Turkey over a decade ago. The concern stems from the worsening balance of payments picture across the developing world and the need to plug big funding shortfalls.
The above chart from Credit Agricole shows that as recently as 2006, the 34 big emerging economies ran a cumulative current account surplus of 5.2 percent of GDP. By end-2011 that had dwindled to 1.7 percent of GDP. More worrying yet is the position of "deficit" economies. The current account gap here has widened to 4 percent of GDP, more than double 2006 levels and the biggest since the 1980s. The difficulties are unlikely to disappear this year, Credit Agricole says, predicting India, Turkey, Morocco, Tunisia, Vietnam, Poland and Romania to run current account deficits of over 4 percent this year.
Some fiscally profligate countries such as India may have mainly themselves to blame for their plight. But in general, emerging nations after the Lehman crisis were forced to embark on massive spending to buck up domestic consumption and offset the collapse of Western export markets. For this reason, many were unable to raise interest rates or did so too late. As the woes of the Turkish lira and Indian rupee showed last year, the yawning funding gap leaves many countries horribly exposed to the vagaries of global risk appetite.
There are some supportive factors however. The Fed's signal this week that U.S. interest rates are unlikely to rise before 2014 shows that central banks in Europe and the United States will continue to gush money for now. So there should be enough cash available to plug the gaps in emerging nations' balance sheets. Second, as growth eases, so will the deficits. For these reasons, Credit Agricole says the market will be forgiving of large current account deficits this year. But it warned:
Guest contributors Bart Turtelboom and Karim Abdel-Motaal run the Emerging Market strategy at Man GLG. The views expressed are their own.
History is written by the victors. That is what emerging markets discovered after their currency crises of the 1990s, and it is what will happen when the annals of the euro crisis are compiled. Treatment of this crisis has varied, but in all its forms the basic premise is already set: Germany and the world are the undeserving victims of Peripheral European excess. The Periphery spent and borrowed too much causing the current crisis. Add to this the cultural imagery of Greek pensioners retiring at the tender age of 55 on exotic Aegean islands at German savers’ expense and the colourful chapter on this historical saga is written.
Hedge fund stories from the past 24 hours from Reuters and elsewhere:
Galleon managers in Asia eye fund buyout - Reuters
ECB warns EU plans could prompt exodus – Reuters
Polygon’s Correa plans Asia hedge fund - Bloomberg
The timing of the Alternative Investment Management Association’s hedge fund disclosure initiative indicates just how strong the winds of change are blowing in hedge fund land.
Coming just a day after ECB President Jean-Claude Trichet called the credit crisis “a loud and clear call” for extending hedge fund regulation, the move shows the hedge fund industry feels it must be more active in deciding the future shape of regulation.
It may not have been a massive surprise, but ECB President Jean-Claude Trichet had an unwelcome message for hedge fund managers today.
The current crisis is, apparently, “a loud and clear call” to roll out regulation to all important market players, “notably hedge funds and credit rating agencies”.