The debate on EM economies (and equities) is heating up. Initially this week, we had the financial world equivalent of the pillory with the widely reported closing of a high profile US hedge fund’s EM fund due to heavy losses in 2013. Solemn nodding followed by EM naysayers suggesting that this is truly a sign of the death-knell of EM as an asset class. The stakes are being raised elsewhere too with the media pitting seasoned investment professionals on both sides of the fence in recent weeks.
We also note that Wall Street’s sell side analysts are beginning to differ. We went into this year with universal bearishness, but we now notice distinct wobble with some prominent research houses starting to timidly suggest investors to nibble at EM equities while others are re-affirming their negative stance.
Our main message is that investors should recognize that not all EMs are alike. So far, recent turmoil in emerging markets has not broken out into widespread EM revulsion. While highlighting some countries to avoid or short, it also means there are opportunities for those willing to discriminate between EMs. Overall, it should be reassuring that markets haven’t hit EMs indiscriminately. Of the main EMs, Turkey has been hit worst and has seen its yield curve flatten. This has negative longer-term consequences for growth if it stays inverted.
(click on pictures for better viewing)
However, two other notorious current-account deficit countries, India and Indonesia, have been relatively unscathed. India’s yield curve flattened only slightly over the last 8 weeks Indonesia’s has steepened and so has Brazil’s.
The key point is: EM economies are not homogenous, and so far markets have respected this. Turkey, South Africa, Brazil, even Argentina, will probably manage to adjust eventually – taking some pain on the way there. But they will likely stabilize.
In fact, differentiation is already happening. Indonesia and the Philippines are already outperforming global equities year-to-date (in USD terms). We have been highlighting these two equity markets in our tactical report in the past month and outperformance should continue.
We have written extensively on EMs in our latest monthly report where we also provide concrete trading recommendations on both the long and short side. Please contact our sales team if you would like a copy of the report.