The so-called crisis in emerging markets was entirely predictable. That’s why those in the know aren’t that worried…
Some people were asking me over the weekend what I made of the Emerging Markets Crisis.
Whoa. Hang on. We’re in a crisis already?? That was quick. I’d better check with the Google.
Yep. Sure enough. There it was. “Emerging Markets Crisis.” In some of the more sophisticated publications it’s been labelled the GEC (Global Emerging Currency Crisis.) Wait, should that be GECC?
Anyway. I read it on Google. It must be true. The world has been thrown into the pit of another crisis.
But I’m as suspicious of the internet as I am of the main-stream media.
“Restore value to your currency with this one weird trick.”
So let’s back it up a bit and see what’s going on.
It is true that we saw some pretty wild devaluations to a lot of currencies last week. Three particularly large emerging markets in particular were rocked hard. The ‘ART’s. Argentina, Russia and Turkey.
But Argentina bore the worst of it. It even fell a massive 8 percent in one day, and event then that was only because the central bank got involved, once it saw that the peso was down 15 percent and it wasn’t even morning tea time.
Ok, sure, the peso has never been a bastion of stability, and it’s been on the slide against the USD for two years now. But in a week when a lot of currencies were on the skids, it was fuel to the fire for the crisis narrative.
At the same time, Russia’s ruble was posting all-time lows against the Euro, and the Turkish lira was also in free fall. Turkey’s central bank jacked up rates from around 7 to 12 percent just to try and stem the bleed.
So far, not so bad. 3 countries does not a crisis make.
Thing is, they weren’t alone.
Currencies were heading south in Brazil, South Africa, Mexico, Malaysia and Indonesia. In fact, they’ve all been coping a beating over the past year.
All up, a Bloomberg tracker of 20 emerging market currencies is now at its lowest level since 2009, while emerging equity and bond funds have witnessed outflows of almost $5 billion in the year to date. That adds to over $50 billion from last year.
That’s some serious coin.
And yes. It’s starting to sound like a crisis.
But this “crisis” feels different. It’s not like the South American crisis of the 80s or the Asian crisis of the late 90s. In those crises, the impact was felt in a particular region.
This time round it’s happening to a whole range of countries across the world. And what do the Russian and Argentinian countries have in common?
In that way, the term “Emerging Market” Crisis hides more than it reveals. Emerging Market can describe almost any economy. And not all emerging markets are in crisis.
However, the “crisis” does have a single origin.
Back in the GFC, people pretty much gave up on America. The banks were run by crooks, the government couldn’t do anything about it. The population were up to their eye-balls in debt.
And the Fed, having already run interest rates into the ground, turned to Quantitative Easing (Q.E). Effectively, it just pumped trillions of ‘fictional’ money into the banking system in a hope that it would fix the problem.
The smart money was a lot of places those days, but it wasn’t in America. The economic prospects were bleak and the Fed had gone crazy. It was only a matter of time before money printing lead to inflation.
And so money fled the US. It didn’t really know where to go, and it kinda didn’t care as long as it was out of the US. The BRICS (Brazil, Russia, India, China, South Africa) ended up with a lot of it.
In part it did reflect superior performance. In 2009, when GDP fell 3.4% in the advanced economies, emerging market economies grew 3.1%.
But in part, it was also any port in a storm.
But now the story has reversed. The Fed is starting to unwind QE, already tapering it’s spend by $20bn a month. And so it turns out, the world got it wrong. The US currency didn’t implode, and there was hope the US was coming through the storm.
Whether you believe this narrative or not, the world is ‘normalising’. The money that fled the US in a massive flight to safety, it’s now looking past safety, and is hunting for returns.
The first stage in this dynamic was the massive unwind in gold positions over the past 12 months or so.
And so now the unwind is calling the chickens home to roost from the emerging markets.
As such, there’s method to the madness. Argentina has finally given up on currency control, and with massive inflation, an outflow of capital was to be expected. Russia’s economy is flagging, and Turkey is beset by political unrest.
But money is not fleeing those EMs that are doing well. Places like the Philippines, Sri Lanka or Vietnam.
If this is a crisis, it is a very selective one.
So what does it mean for us?
Well, the short answer is, not much.
Some of the money that fled the US ended up here, and the recent depreciation we’ve seen in the Aussie reflects some of that money going home, but we’re still looking strong. The factors that brought the money here – economic stability, relative high interest rates – they’re still in play.
There is a chance that the Fed might take a bit of a breather to see how EMs adjust to the new QE levels. They don’t want to knock over one of their biggest export destinations.
And that means the money taps will stay on for longer. And that will keep the money flowing into real assets like property.
It will be interesting to watch how it unfolds, but it doesn’t change the investment game-plan.
Keep calm and carry on.