Frankfurt Robin Brooks is concerned: “There is a ‘risk-off’ brewing in the emerging markets,” tweeted the chief economist of the major bank organization IIF in Washington on Wednesday. “Risk-off” is the short formula for the fact that investors get cold feet and withdraw their money – which ultimately leads to corresponding price drops.
Brooks compares the extent of the outflows with similarly dramatic shifts in 2013 and 2015. A good seven years ago, Ben Bernanke, the then head of the US Federal Reserve (Fed), triggered the so-called taper tantrum: a shock reaction from the markets as a result of the announcement , The Fed will cut back its loose monetary policy a little. In 2015, China caused uncertainty. At that time, there was concern that the Chinese could massively devalue their own currency in order to secure their competitiveness. It was kind of a prelude to today’s trade conflict with the United States.
Brooks commented on the current outflows with the words: “And this is happening while the uncertainty surrounding the US elections is only just beginning to emerge.” Only then did it become known that US President Donald Trump had caught the corona virus. That increases the uncertainty even more.
The asset manager Jupiter AM has a similar opinion: “Emerging market stocks got off to a strong start in September, but the gains since the beginning of the month were wiped out again by the broad market sell-off at the beginning of last week.” It became dangerous wherever foreign financing was a major one Plays a role, for example at the global level in banks and raw materials companies and in Turkey as a whole.
The IIF published the associated data one day after Brooks’ warning call. You confirm: The drama is a very new development. It is shown in the high-frequency data, i.e. the information that depicts what is happening in real time. For the whole of September, the IIF economists estimate the inflow of capital into emerging market securities at 2.1 billion dollars. That is well above the August value of $ 0.7 billion. It was not until later in the month that the fear of investors, who had previously been quite optimistic, took hold.
However, the data also show a very mixed picture. Because the equity markets of emerging countries lost $ 10.8 billion for the entire month. Bond markets, on the other hand, rose by $ 12.9 billion. Get out of stocks and into bonds: This also symbolizes that the greatest optimism has come to an end. Four billion dollars alone flowed out of the Chinese stock market – an indication of the extent to which geopolitical tensions and the ensuing trade and technology war play a role.
Emerging countries are time and again heavily dependent on events that primarily take place in developed countries. US investors, who largely dominate the markets solely in terms of volume, react according to a simple scheme: if they are confident, they take risks and also invest in economically weaker regions. As soon as the worries increase, it is “risk-off” – they take the money home.
The emerging countries, whose capital markets are still relatively small, are particularly feeling the impact. A minimal movement measured in the US capital market can have devastating effects on individual emerging markets. This was already evident in the great financial crisis after 2008: In individual countries such as Egypt, the stock market was previously pumped up dramatically, which attracted many local small investors to the stock exchange. Then the market virtually collapsed and the brave local investors were practically expropriated.
For private investors, the current situation in the emerging markets is difficult to assess. The chief economist of the US investment firm MFS, Eric Weisman, is skeptical. “This is not a good time to invest there,” he says. From his point of view, what countries like Brazil, South Africa or Mexico need is an environment in which the rest of the world is growing and the US dollar is trending weaker.
The US currency has lost value against the euro since the beginning of May. However, it rose strongly against most emerging market currencies over the year. That slows the economy, because many companies and countries have borrowed in US dollars. However, Weismann is optimistic about China. There he expects growth of five to six percent again soon.
Swim against the current?
Anyone who leaves the emerging regions quickly may do so at a loss – and then discover that the situation will turn around again in a few weeks or months. After all, it is possible that the US election will go ahead without a legal dispute over the outcome.
What remains are the certainly devastating effects of the corona pandemic in some countries. Many emerging countries do not have the financial means to counteract the resulting problems through high borrowing. The current crisis is at best an opportunity for investors who literally want to swim against the flow of capital in order to secure favorable entry prices.
This inevitably leads to the question of what an investment in emerging markets can be good for. For almost all investors – and this applies even more to private investors – these regions are hardly suitable as the core of a portfolio, but rather as an admixture.
The American alliance subsidiary Pimco cites the search for returns as possible motives for buying emerging market bonds, for example with China bonds. On the other hand, part of the portfolio can be invested in such a way that the value moves in the opposite direction to the stock market. As the IIF data show, bonds and stocks are actually moving in opposite directions in some cases within the emerging markets. In the event of a risk-off, however, investors flee from both areas.
Indeed, emerging market bonds offer at least some regular yield. This is also pointed out by the US bank expert David Furey State Street down. However, he warns: “For some countries that have borrowed in hard currencies, the challenges are great.”
How investors could invest
As a drastic example he cites the small country Belize, 90 percent of which lives from tourism, which is currently practically non-existent. The State Street expert therefore recommends bonds in local currency. At first glance, they are more risky than those in hard currency, which means primarily the dollar. After all, emerging market currencies also suffer in the event of a risk-off. On the other hand, interest-bearing securities in hard currency are more likely to experience payment difficulties if the respective government runs out of money.
Developments over the past few weeks confirm the general perception: emerging markets are a hot topic. Many investors are currently afraid of getting their fingers burned there. But if you have a lot of courage and some money to spare, you can see this as an opportunity.
Furley advises investing in indices rather than individual stocks. Because it is very difficult to correctly assess countries and regions with their very different problems, “active management is very expensive” in this area, he emphasizes. State Street names indices such as the JP GBI-EM Global Diversified for government bonds in local currencies and the JP EMBI Global Diversified for government bonds in hard currency.
Both can be mapped using exchange-traded funds (ETFs). The local variant is available, for example, as iShares JPMorgan EM Local Govt Bond ETF (securities identification number A1JADV). Similarly, emerging market stocks can be bought using the MSCI Emerging Markets Index. Lyxor, among others, offers a corresponding ETF (ISIN FR001042906).
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