Emerging markets look set for more turbulence

By Markets Editor Andrew Van Sickle Jun 05, 2006

Andrew Van Sickle

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When global investors become more risk-averse, traditionally risky assets are ditched first. So it’s no wonder the MSCI Emerging Markets index has dropped by about 15% from a record peak after a ten-day rout. This Monday alone, the Turkish market lost 8.3%, Egypt 7% and Russia 9%; India fell by more than 10%, prompting a one-hour closure of the market. 

Further turbulence looks likely. The setback in commodities markets poses a problem, as raw-materials firms account for half the earnings in emerging markets. Note too that emerging markets are at risk of unwinding carry trades (whereby investors borrowed at low rates and invested the money in higher-yielding assets). Another problem is that emerging markets looked pricey before the blow-off: their 15% discount to developed markets was about half the average since 1995, according to James Montier of Dresdner Kleinwort Wasserstein. So, following emerging markets’ 225% three-year run-up, this seems a good time to take profits.

Over the long-term, however, the segment remains appealing. As Joanne Irvine of Aberdeen Asset Management points out, “the economic environment has never been so good”. Firms have cleaned up their balance sheets and inflation has fallen, while the commodities boom has created trade surpluses in many emerging economies, making them less vulnerable to foreign-capital flows. India, for instance, looks highly promising, as we noted last week. GDP growth is at 8% and Indian companies boast the lowest debt levels and highest profitability in Asia. The nasty slide this week has rattled observers, but shouldn’t deter investors considering a long-term punt. According to India Capital Management, Monday’s slide was due to forced selling as brokers ditched overleveraged local investors’ holdings to minimise their exposure to the falling market. The fundamentals remain excellent – and the market is now 20% cheaper than last month.


 

Published in Stock markets | More articles by Andrew Van Sickle

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