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With everyone braced for the U.S. Federal Reserve's first
post-pandemic interest rate rise next month, clouds appear to be
gathering over emerging economies once again.
The prospect of a rising U.S. Treasury yields and appreciating
dollar is typically a twin torture for governments and companies
heavily borrowed in greenbacks - an exposure few in the
developing world have been able to shake.
And given that emerging stocks as a basket have never truly
recovered from the last Fed 'liftoff' that began with the
so-called 'taper tantrum' of 2013, the outlook appears bleak as
they face a second liftoff again in less than 10 years.
One of the few positives is most investors seem to have
skedaddled already.
Funds' positioning in global emerging markets equities fell to
net 2% underweight last month, according to Bank of America fund
manager survey. That was a full standard deviation below
long-term averages and a eye-watering reversal of the net 60%
overweight seen as recently as late 2020.
There's been no let up this year. EM funds did not escape a
generally wobbly start to the year everywhere - with last week
seeing the 7th consecutive week of net outflows from emerging
equity and a 4th straight week of exits from EM bond funds.
For all the national pros and cons missed by broad EM index
investing, it's hard to imagine a worse constellation over the
past year for MSCI's benchmark emerging equity index - one
that's now almost 50% Chinese and Taiwanese companies.
Aside from the drama of the pandemic itself, exaggerated in
recent months by China's "Zero COVID" policies while other
economies kept largely open through the Omicron variant, rising
dollar interest rates and fractious geopolitics between the West
and both Beijing and Moscow has rankled like never before.
The near collapse of China's debt-laden property sector and the
government's crackdown on the country's tech giants as part of
its "common prosperity" push jarred even more.
Amid all that, the investment world was forced to enter 2022 on
tenterhooks over a possible Russia invasion of Ukraine - a
standoff that last week seemed to cement China/Russia alliance
in opposition to G7 and NATO, exaggerating the global energy
price and inflation crisis in the process and upping pressure
for higher U.S. interest rates.
(Graphic: Emerging Markets Central Bank Rates,
https://fingfx.thomsonreuters.com/
gfx/mkt/dwvkrjyznpm/One.PNG)
(Graphic: EM indices relative performance vs S&P500 since 2013's
'Taper Tantrum',
https://fingfx.thomsonreuters.com/
gfx/mkt/zjpqkamylpx/Two.PNG)
DARKEST BEFORE DAWN?
There are those who think the darkest hours are before dawn; or
that EM will win when 'value stocks' have their day; and even
that extreme positioning provides opportunities. That's led to
some calling for a return to emerging equity at the strangest
time.
Some of the thinking is simply eyeing a turn in sentiment toward
China as the pandemic endgame unfolds and the People's Bank of
China bucks a global central bank trend with easing of its own.
Others reckon a peak-to-trough 18% drawdown in MSCI's equity
benchmark over the past 12 months has run its course as a result
and a 'bear market' signal in the event of a recoil of more 20%
just isn't warranted.
Some also think emerging companies should benefit from pumped up
oil and commodity prices driving decades-high global inflation
rates - although tech stocks are now a bigger overall weighting
in the MSCI's index than materials, energy and industrials
sectors combined.
And tech stocks don't like higher yields much.
A more cogent hope is that many emerging market central banks
have dodged the oncoming bullet of a soaring dollar against
their currencies by tightening sharply in advance.
In the year before the Fed has even contemplated rate rises,
Brazil's central bank has hiked its policy interest rate by
almost 9 percentage points to 10.75%; Chile added 5 points to
5.5%; and Russia and South Korea doubled their equivalents to
8.5% and 1.25%.
If that pre-emption reins the dollar in during this Fed hiking
cycle - and China continues to ease further - it may just allow
emerging central banks some breathing space to end their
tightening earlier, offering attractions to bond investors
fearful of what developed world fixed income has in store.
That's a big 'if' and goes against consensus views on the dollar
for this year.
But it does speak to other hopes that the model of emerging
economy growth is shifting away from a reliance on exports to
more home-grown drivers of domestic demand.
"Emerging markets are breaking away from their dependence on the
developed world," said Columbia Threadneedle's head of global
emerging equities Dara White.
"Investors should now be looking at emerging markets through a
different lens," he added.
End of a lost decade? We'll see after March.
(by Mike Dolan, Twitter: @reutersMikeD; Editing by Alexandra
Hudson)
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