Emerging Markets??

by Michael J. Howell21. June 2013 07:48
Emerging Marets are in the eye of the storm. This not a surprise but it is important to understand why, not least because investors currently have relatively low exposure. Our long standing mantra is that every EM crisis is first-and-foremost a currency crisis. EM have suffered this year from a lack of capital inflow. Tensions have been worsened by a tight Chinese monetary stance that shows few signs of abating, and the collapse in the Yen. Traditionally (pre-mid 1990s) the Yen was the key driven of the Asian business cycle. This troubling backdrop has forced EM policy-makers to tighten their own policies to protect currencies, but in the process they are causing significant domestic economic slowdowns, that in turn add further downward pressure on currencies. Viz Turkey and Brazil. Liquidity levels on our indexes are very low, circa 35 index level (0-100 'normal' range). They need to jump before we recommend returning. This probable influx of Central Bank cash will further weaken EM currencies and trouble EM bonds, and the sell-off in EM credits may spread out into Eurozone credit markets which also look highly exposed. The second half year 2013 looks a better time to re-enter EM assuming currencies have adjusted, since by then there should be strong signs of cyclical rebound in the US and Japan.

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