Balance sheet in chiaroscuro for the stock exchanges of emerging countries. Since the beginning of the year, they have not stemmed the losses: Turkey -4,75%, Brazil -7,5%, Mexico -6,2% and Russia -13% also affected by tensions in Ukraine. Hong Kong (-7,6%) and Shenzhen -7,3% are also bad. Instead, they managed to resist the sales: India +2,98%, South Africa +1,42% Argentina +12,11%.
The Fed's tapering, slower growth rates in China, fears generated by the sharp devaluation of the peso in Argentina and political instability in Turkey constituted a “perfect storm”, which caused investors to flee emerging markets at the end of January (all sectors of the equity, bond and currency markets suffered declines). In the new context of reduced monetary stimuli, the imbalances of emerging countries have returned to the spotlight after years in which abundant liquidity flowed in a rather undifferentiated manner to all emerging countries in search of yields. Years in which many, however, remained idle on the front of structural reforms and today they find themselves faced with a deterioration of the current account, an increase in domestic inflation and a decline in corporate yields.
Faced with the drastic outflow of capital and devaluation, the weakest countries were thus forced to raise interest rates to curb the devaluation of their currencies. In a surprise move, the Reserve Bank of India raised its key rates by a quarter of a percentage point to 8%. Turkey, also grappling with a political crisis, resorted to a shock increase in rates that went beyond expectations in an attempt to curb the collapse of the lira: the overnight was brought by the central bank from 7,75% to 12% while the weekly repo, which has become the new reference rate, even went from 4,5% to 10%. After Ankara, South Africa too raised rates against all odds: for the first time since 2008 it tightened the cost of money, from 5 to 5,5%.
STRATEGY 2014: TIME TO REPOSITION OR LOOK ELSEWHERE?
Today analysts are divided: is it time to go back or do we risk a bloodbath? Many believe that 2014 as a whole will be a difficult year, given that the exit from the Fed's monetary stimulus policies is not simple and is far from over, even if it has now started at a moderate and constant pace. Capital outflows from the emerging markets are therefore a scenario that will continue to weigh on the markets. In addition, there are those who point out that the economic prospects have worsened and that the profitability of companies has come under pressure. For others, the jolts and the stampede instead represent a buying opportunity. The danger of an epochal crisis such as that of 1997 (which led to Russia's default in 1988) does not seem to frighten the experts that much. Back then, with fixed exchange rates and the dollar as the domestic reference currency, structural adjustments were more complicated. Today, currencies can also move sharply, facilitating adjustments in terms of reducing the balance of payments deficit or reducing the inflation rate.
If the escape hit all the emergent in a fairly undifferentiated way, what seems certain is that from now on the central theme will be that of differentiation in terms of fundamentals (e.g. balance of payments, currency strength and export contribution to GDP). The closing of the taps of the Fed, albeit at a "moderate" pace, will bring to light the structural weaknesses of some emerging economies in a year, 2014, of elections for several emerging countries, cHelping to create a gap between those countries that have been able to maintain their accounts and those that have not. In the document “Emerging Markets Equities 2014 Outlook: The turning point for EM equity markets?” the Natixis company, for example, believes that the outlook for theAsia is better than that of Europe, the Middle East and Africa and also compared to Latin America, because countries in the Asian area are less dependent on external financing due to higher GDP growth forecast for 2014 and a current account surplus of around +2%. “Furthermore – explains Natixis – currencies, with the exception of India and Indonesia, appear less vulnerable than those of other emerging areas. In this context, the emerging markets of Asia appear well positioned, and we start the year with a preference for Northeast Asia over Southeast Asia”. China's consumer, IT, financial services and clean energy utilities could benefit from the reforms announced by the government. These reforms, if effectively implemented, could lead Natixis to a positive economic outlook for the country and solve the problems that have caused Chinese equities to decline steadily over the past 3 years. Then there are the South Korea e Taiwan which could benefit from the recovery in demand from developed markets. However, Natixis warns, the hurdles resulting from the strengthening Japanese yen could hurt South Korea as it puts pressure on the competitiveness of Korean companies.
