Scared investors are fleeing from emerging markets hoping to avoid a similar fate suffered in the late nineties, while contrarians are ignoring the alarm bells and hunting for bargains…
If the Chinese economy is indeed slowing, or the Indian rupee is in fact weakening, then active investors of emerging markets haven’t bothered to read the memo.
That’s because they are too busy growing their overseas portfolio on the cheap while everyone else is running for the hills.
But those that are buying must be a pretty small contingent because there’s been quite a bit of blood spilled in the streets already.
In the two weeks ending February 5th, more than $12 billion in capital was removed out of developing-nation equity funds, according to Morgan Stanley.
That’s the biggest outflow since January 2008 and has devalued emerging-market stocks to their lowest level in more than five years.
Adding fuel to the fire, the US Federal Reserve’s decision to taper its monetary stimulus program has also slammed the breaks on a market segment that was tearing up the charts over the last few years.
Seeing as advanced nations appear to be doing better than their counterparts, shifting out of emerging markets would seem quite logical.
Eurozone GDP has been on an uptrend, the US real estate market is showing further improvement, Japan’s CPI is on the rise, Great Britain’s unemployment rate is declining faster than expected…the list can go on.
But for the value seekers of the world, there’s never a better time than when markets get battered. And now could be the perfect moment to go bargain hunting for emerging market equities.
Same Fear, Different Time?
Emerging markets certainly had a tough go over the past year and they’re not out of the woods yet.
Brazil and Turkey saw their current account deficits widen since the summer. The Argentinian peso, Thai baht, South African rand, and yes – the Indian rupee – have all tanked.
Other developing countries continue to experience similar economic challenges.
As such, a growing number of investors have reevaluated their portfolios in favor of mature markets.
But is the sell-off signaling a crisis? Are we looking at a repeat of the emerging market exodus of 1997-1998?
Memories of the financial collapse in Asia in 1997 followed by Russia’s implosion the following year have no doubt come flooding back. For those who are cashing out, they no doubt feel that the house of cards is falling once again.
In some cases, the current panic over developing markets has a lot to do with political unrest – which of course, goes hand in hand with slumping economies.
Violent uprisings are rampant from Venezuela to the Ukraine. Turkey’s prime minister is embroiled in a corruption scandal. Industrial workers are protesting in South Africa, and Thai patriotism is fracturing.
It’s quite an ironic backdrop to the recently ended Olympic Winter Games where these same nations were all in good spirits.
But not all is lost – at least not yet.
Why there’s still hope
To the doomsday advocates out there, I say, “Please be patient.”
You see, this isn’t exactly a case of history repeating itself, and there are a few reasons why…
For one, many of these countries have learned lessons from the past.
Gary Dugan, a chief investment officer for Coutts, states that emerging markets of today do not have the same levels of debt like they previously did before the crisis in the 90’s.
“If you look back to the problems that India and Indonesia had in the middle of last year, both countries worked very hard for six months to ensure either [cash] reserves were rebuilt or they became more competitive in international markets,” Dugan said.
India of course, narrowed its current-account deficit largely by banning gold imports while Indonesia’s curbing of imports helped to make the rupiah one of the strongest currencies in Asia.
Governments in Mexico and South Korea also seem committed to undertaking reforms, and this is being reflected in the recent rise in investor confidence.
Even in the highly skeptical nation of the Philippines, a ten-year sovereign bond with an interest rate of just 4% was successfully issued last month.
So while some investors are expressing similar fears today as they did to events that unfolded 15 years ago… déjà vu, this is not.
Another potential saving grace is that a number of these emerging economies, including the Fragile Five (Brazil, India, Indonesia, South Africa, Turkey) — all have elections this year.
If the strong leaders are voted into power, they can have major stabilization impacts on these economies and potentially set them up for quick turnarounds in the near future.
According to Craig Botham, emerging markets economist at Schroders, a British asset management firm, “Elections could prove a trigger for positive reform efforts. Democracy does not lend itself to painful decisions in the run up to elections, but the immediate post-election period is often when governments feel they have the strongest mandate to effect change.”
Bullish investors need to keep in mind that equity valuations between emerging and developed markets have grown to their largest gap in nearly 8 years.
Until elected officials can effectively stabilize the political upheavals, there could still be some bleeding ahead for emerging markets.
Nonetheless, it’s hard not to notice that emerging market equities are depressed and look quite attractive at these price levels.
Top Stocks To Buy:
ETFs like iShares MSCI Emerging Markets (EEM) or Vanguard FTSE Emerging Markets (VWO) are a couple of excellent yet easy products that can help investors gain exposure to this down beaten market right now.