Are Emerging Markets Really a Problem?

Posted in: Economics, General, Stock Market, Thought of the Week

Recent talk of economic meltdowns along with slower China growth has managed to spook everyone on Wall Street. As a result, many investors are simply dumping their emerging markets holdings and running for cover in fear of history repeating itself.

In the summer of 1997, a currency crisis began in Southeast Asia after Thailand enacted a dramatic change to their monetary policy.  Two years after this change, anxiety still loomed over global financial markets. Initially it was perceived to be a localized crisis in Thailand, but the crisis began to spread to Malaysia, Indonesia, and the Philippines. By the fall of 1997, the crisis had extended to South Korea, Hong Kong, and China. Then in 1998, Russia and Brazil saw their economies enter a free-fall. The result was international stock markets hit record lows as investors’ confidence was shaken by the volatility and uncertainty in the world’s financial markets.

Since the beginning of 2013, performance on the MSCI Emerging Markets Equity Index (MXEF) has been rather weak. Our Investment Committee believes there are four main reasons for the recent decline in emerging markets equities:

  1. China Manufacturing: Investors became worried back in January when China released weaker-than-expected manufacturing data. Since China is one of the largest customers to other emerging markets, investors feared that a slowdown would harm these suppliers.
  2. Inflation Fears: Venezuela and Argentina are battling rising inflation due to poor fiscal and monetary policies. For instance, Argentina’s inflation rate is currently estimated to be as high as 30%, and local merchants are being forced to raise prices on a daily basis just to keep up.
  3. Political Unrest: Thailand, Ukraine, and Turkey are all in the middle of political turbulence, and markets dislike uncertainty.
  4. Fed Tapering: Investors who invested in emerging markets in search of yield are now returning as the Fed begins tapering. Since the Fed is buying fewer bonds, investors are anticipating falling treasury prices and more attractive risk-adjusted returns.

Despite the dismal performance of emerging markets to start the year, our Investment Committee is highly skeptical of the possibility for material impact to U.S. equities. Our Investment Committee believes that the move from emerging markets back to the U.S. is nothing more than a normal cyclical rebalancing of capital inflows from a region with less opportunity for future gains to one with more attractive risk-adjusted returns. To sum it up, our Investment Committee does not believe the current situation with emerging markets would impact the long-term earnings of U.S. listed companies.

Read this week’s Thought of the Week to learn more about what is occurring in emerging markets at the moment.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.