Global Investing

Emerging markets coming off the turbulent boil?

Is it all over? Is the emerging market turmoil no longer a concern among investors, economists and academics? Measured at least in the last week, the market is recovering some lost ground. Maybe  January’s sell-off was enough and in the last week all boats seem to be rising once again. After all, there’s a new Fed Chair in Janet Yellen who has now officially taken over and the likelihood of easy monetary policy, tapering of asset purchases notwithstanding, isn’t expected to change.

MSCI’s emerging market benchmark stock index has rebounded 3.5 percent from a Feb. 4 low. The U.S. benchmark S&P 500 stock index has risen slightly more over the same period.

Taking the pulse of the market sentiment at the University of Delaware following a speech by Philadelphia Fed President Charles Plosser, it appears there’s less concern emerging market woes will take down the world. In a straw poll of the audience (rough estimate put the number at 350+ attendees), the message was upbeat.

In Delaware this morning, at least, the audience was asked how much they expected, if at all, the U.S. market would be roiled by turmoil in the emerging markets? Very little was the answer. The majority, 59 percent, said there would be little impact, although a sizable minority at 29 percent said there would be a lot. Just 5 percent said it was 1997 all over again and 7 percent said no impact at all. Plosser said the current volatility in emerging market currencies could still pose a risk if they were to spill over more broadly into other financial markets. However, he did not consider it a significant risk to the U.S. economy at this point. “While there continues to be some downside risks, for the first time in a few years, I see a potential for some upside risks to the economic outlook. We need to consider this possibility as we calibrate monetary policy,” Plosser said.

When it came to the Fed completing its taper of asset purchases by the end of the year, however, the answers were not so clear cut. An equal amount, 42 percent, said the fed would finish its course of tapering by year end. However, 42 percent said no, the emerging markets or an economic slowdown will force the Fed to stop its tapering measures, thereby keeping its asset purchase program, currently at $65 billion a month, going for longer. Plosser, by the way reiterated that he wants to see tapering finished sooner rather than later because at this point it is “neither helpful or essential.” Just to round it out, 14 percent said they didn’t know if the Fed would finish tapering in 2014 and well, 2 percent just didn’t care.

In Chile, what’s good for stocks will be good for bonds

 

Felipe Larrain, Chile’s finance minister is facing a new job come March when incoming center-left government of President-elect Michelle Bachelet takes over. An academic by profession, he intends to either make his way back into the cloistered lecture halls of a university, not necessarily in Chile, or work for some kind of international organization that is outside of the corporate or financial world.

Chile’s economy, one of the best run in Latin America, with the highest investment grade credit rating in the region, is however experiencing a soggy point in its economic cycle. Inflation has picked up. There is continued weak economic output and domestic demand is cooling down. The central bank is holding its benchmark interest rate at 4.5 percent and suggests more stimulus is to come in the months ahead. The currency has depreciated but that’s not a concern, Larrain said. He was more concerned when the peso was trading in the 430 per U.S. dollar range versus today’s 3-1/2 year low of 545, an area he describes as providing equilibrium.

But before departing from his ministerial duties, Larrain outlined some of the achievements of his four years in office. The latest is the passage of the ‘Ley Unica de Fondos’, or ‘Investment Funds Act’. In Chile’s fixed income market, foreign participation is a minuscule 1 percent versus 35-40 percent in equities. “What the laws have done to equities, this will do for fixed income,” Larrain said in an interview with Reuters.

Barclays sees 20 pct rise in EM bond supply in 2014

Sales of dollar bonds by emerging governments may surge 20 percent over 2013 levels, analysts at Barclays calculate.  They predict $94 billion in bond issuance in 2014 compared to $77 billion that seems likely this year. In net terms –excluding amortisations and redemptions — that will come to $29 billion, almost double this year’s $16 billion.

According to them, the increase in issuance stems from bigger financing needs in big markets such as Russia and Indonesia along with more supply from the frontiers of Africa. Another reason is that local currency emerging bond markets, where governments have been meeting a lot of their funding needs, are also now struggling to absorb new supply.

The increase is unlikely to sit well with investors — appetite for emerging assets is poor at present, EM bond funds have witnessed six straight months of outflows and above all, the projected rise in sovereign supply will come on top of projected corporate bond issuance of over $300 billion, similar to this year’s levels. (See graphic)

A boost for cheap emerging equities. So will they bite?

Emerging stocks have rallied 3 percent today after the Fed’s startling decision to leave its $85 billion-a month money-printing in place, and some markets such as Turkey are up more than 7 percent. With the first Fed hike now expected to come in 2015 and tapering starting only from December, emerging markets have effectively received a three month breather. So will the buyers return?

A lot of folks have been banging the drum about how cheap emerging markets are these days. But imminent Fed tapering has been scaring away any who might have been tempted. Plus there is the economic growth slowdown that could knock profit margins at emerging market companies. Bank of America/Merrill Lynch which runs a closely watched monthly survey of fund managers shows just in the following graphic how unloved the sector is relative to history:

So should people be buying? BofA/ML certainly thinks so: its strategist Ajay Kapur suggests emerging stocks are 20 percent undervalued. He acknowledges all the risks out there but reckons they are all in the price by now: