Wednesday, August 28, 2013

Emerging market crisis and no one is watching

It seems like there is an emerging market crisis and no one is watching or concerned. Of course, there are reports in the newspapers, and followers of global markets know there has been some significant sell-offs, but there does not seem to be much concern on what may be the implications across all markets. Policy-makers are saying there should be some action that is coordinated but that talk has been very loose. 

Emerging market stocks as measured by the MSCI index are down 10 percent for the year. However, this does not measure the full extent of the damage in some countries that have current account deficits. Emerging market bonds have also suffered so those that have undertaken the carry trade of buying high yielders in EM and financed with the dollar are underwater. The idea of finding cheap financing in the US may be coming to an end and investors are leaving the EM party. This is becoming similar to other past stories when the Fed is tightening.

This overall crisis does not actually take into account the problems with specific currencies such as the Indian rupee which is off by well over 20% since the end of the first quarter. This is a large move in any currency. There is a clear "sudden stop" current account deficit problem whereby no one wants to fund Indian debt. Price will adjust but the full fall-out from this currency adjustment is just beginning. There is a major current account deficit problem that will require an overhaul of the government finance and a private companies to retrench.

There is little focus because because the decline has not be a rapid shock but just a steady downturn that is relentlessly applying pressure on prices.

There is going to have to be intervention to protect currencies or capital controls  to stem the outflow. There is little likelihood that internal policies will change in may of these countries so you can expect that EM should be off limits for investors who want safety or stable returns.

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