Luigi Einaudi said that investors have the heart of a rabbit, the legs of a hare and the memory of an elephant. His intent was to promote sound finance and to avoid, in the difficult post-war situation, cunning and coups de main by governments that could have been tempted by debt restructuring, inflationary escape routes or monetary reforms with a confiscatory.
In reality, things are not always like this.
Behavioral finance teaches us that many are reluctant to run away from bad investments and to cut losses in time (therefore the legs are not for hares). As for elephant memory, sometimes it works and sometimes it doesn't. There are issuers, in Latin America and beyond, who in two centuries have repudiated or restructured their debt more than ten times and who in any case manage each time to make their past forget and to convince someone, sometimes many, to lend them money again. A little rouge and a higher rate and you're done.
In a way, that's right. If memory were truly elephantine, no one would buy the bonds of a country at a negative rate, Germany, which in a century defaulted after a war, wiped out the value of savings with hyperinflation and then, after another war , carried out an intelligent monetary reform which however cost its citizens, through half a century of patrimonial assets, half of their wealth. But life has to go on and, at some point, pages have to be turned. After all, today we have already forgotten almost all the fears that shook the markets in January and February. No one spends sleepless nights following the Shanghai stock exchange or the renminbi. Analysts are no longer asked to calculate the probabilities of a global recession, but to provide lists of stocks and commodities to buy to use excess liquidity in portfolios.
This relaxed climate is largely made possible by the fact that the central banks, at least they, have not forgotten what happened in January and February (and which we had already seen in August) and know that we need to give ourselves a lot of do to prevent it from happening again. Now, if it is true that only historians will be able to evaluate how effectively the overall strategy after 2008 will have been, there can hardly be any doubts about the almost virtuosic ability of policy makers to shore up, gain time, patch up and move forward.
We've seen this capability at work over the last month in a clearly coordinated way. China, which had promised not to resort to toxic stimulants in the long run, has swallowed the whole bottle of old pills (still credit to state-owned enterprises, other infrastructures) however, mixing it with a new drug that is less harmful and more suitable for the new times ( consumer credit). Japan has shelved the dreaded VAT increase and has promised to once again devote itself with enthusiasm to the activity that has kept it going for the last quarter of a century, public spending. Europe has pledged to support credit (hoping to find would-be debtors) and to implement quantitative easing that does not aim to weaken the euro.
America, to close the circle, proclaimed with Yellen its will not to make the dollar rise again and thus to allow China, from which we started in the reasoning, not to run out of foreign exchange reserves to defend the renminbi. Technically it is a small masterpiece. The world is safe once again, although he will have to use the time he has gained well if he does not want to find himself back to square one soon. In this new climate of new-found peace between markets and central banks, the dish of the day is made up of emerging markets. Indeed, the dollar stuck in its rise provides a floor for raw materials. The recovery of raw materials, in turn, is strong enough to restore color to producing countries such as Brazil and Russia, but not strong enough to constitute a problem for emerging importers such as China, India and Turkey.
Emerging countries also have low (or not high) valuations, high yields, balanced exchange rates and the fact that they are now under-represented in portfolios on their side. If we then consider the greater caution on the part of the Fed in raising rates, we clear the field of the greater concern for those who invest in emerging markets. Finally, it should not be forgotten that even on the political level the worst moment for these countries could be behind them. Russia will sooner or later see an easing of European economic sanctions.
Turkey, thanks to the refugee issue, has once again enjoyed particular European attention which takes the form of economic aid and opening up to trade. In Brazil, the process of political change is picking up speed (South Africa is further behind but Zuma is now closely watched). Argentina is in full swing, while Chavista populism has lost all driving force in all of Latin America. On the eastern front, Saudi Arabia and its satellite states are engaged in a positive process of economic self-reform, while Iran is less distant from international markets every day. India and Mexico, for their part, are confirmed as politically stable countries with good growth rates.
That said, we would like to warn against over-enthusiasm. In fact, it is always difficult to find balanced judgments on emerging markets and periods of euphoria alternate (as was the case in the last decade) with phases of total rejection (Asian crisis, current decade). Let's not forget that, just two months ago, the markets were pricing in chain defaults of commodity-producing countries. Going into more detail, the recovery of raw materials, from which the whole discussion on emerging markets starts, will probably be very gradual and modest. Making money on the exchange rates of exporting countries won't be impossible, but the appreciation of their currencies won't be spectacular at all.
The devaluation of the last few years, this one being considerable, has made it possible to reduce the current account deficit (for example in Brazil and Turkey) but has not resulted in a balance or surplus, but simply in a smaller and more manageable deficit. Growth rates will also remain historically low. The flood of consumer credit in recent years will give way to a slow and arduous process of reducing household debt. Brazilian per capita income, which was 12 dollars three years ago and has now dropped to 8700, will be 8500 in 2025. In practice (these are Bank of America estimates) the population will grow faster than income and the next few years will to repay debts, not make new ones.
To give another example, Russia has certainly withstood the weakness of oil and gas better than expected thanks to large supply contracts with China and thanks to the patience of its population who have accepted a reduction in the purchasing power of wages. This will not make it easy to create a diversified economy less dependent on oil. In the past, emerging markets have accustomed us to phases of euphoria in which it was possible to simultaneously earn on the exchange rate, enjoy a positive carry on bonds and take home a capital gain on bonds and shares. Today, after the ongoing recovery phase, it will be more difficult to make money on three fronts. However, it will be very possible, relying on stabilized currencies, to enjoy very high current yields or equally substantial dividends detached from shares that are certainly not expensive in relative tranquillity. The alternative, let us remember, is the yields closer and closer to zero or below zero in our house.
