Emerging market rapids v calm US waters
There is also the circumstantial evidence that the US market only entered this financial Sargasso once the Fed had administered its final injection of QE bond purchases at the end of last year. That might imply that the second wave of normalising monetary policy — raising rates — could cause problems. It remains deeply worrying to see the US market become quite so becalmed.
Timing can be a mug’s game. At the turn of the year, I suggested that anyone who could afford to put away their money for a decade, should gently shift money from the US to emerging equities. That remains a good idea.
Those prepared to play the dangerous game of waiting for the bottom should wait a little longer. Events could well create a cathartic fall quite soon.
…what is more alarming: drama, or the absence of it? Or put more relevantly to current circumstances: should we spy opportunity in the dramatic and co-ordinated sell-off in commodities and emerging market securities, or should we rather fear the next step after the world’s stock market, in the US, has been ironing-board flat all year long?
Let us start with commodities and emerging markets. They are linked. Strong commodities help the emerging world both because they generate income for many countries, and because demand for raw materials shows that others are strong. Commodities over more than a century, and emerging markets over the three decades or so that they have been treated as an asset class, have both shown a propensity to move in long cycles.
The commodity-emerging market complex rallied spectacularly in the years before the 2008 crisis, and then after a brief spasm set new highs as huge Chinese stimulus (sucking in commodity imports), led the world out of the Great Recession. For the past three years it has been downhill all the way.
This is easy to explain. First, many saw that the rally was overdone, and prices too high. Second, easy monetary policy failed to create inflation in the west. Third, China lost steam. Fourth, the 2013 “taper tantrum”, as many emerging currencies shot downwards in response to hints of tighter policy from the Federal Reserve, revealed vulnerabilities. With this week’s Fed meeting leaving open the option of a September rate rise, dealers are taking evasive action. Fifth, last year’s oil price collapse hit exporters, led by Russia. Finally, several big emerging countries have alarming politics, led by Brazil.
Buying when all hope has been abandoned can make huge money, and such moments are generally created by politics. The most spectacular buying opportunity in recent history came in Brazil when investors treated the election of Luiz Inácio Lula da Silva as president in 2002 as though the country had moved over to communism. Brazilian stocks gained almost 2,000 per cent over the next six years. Have we reached such a moment?
The falls have been dramatic, but if the complex is to end up as undervalued as it was at the bottom of the last cycle, they have a long way to go. Since the peak, emerging markets have dropped 47 per cent relative to the developed markets, according to MSCI: but would need to fall another 33 per cent from here to drop back to their Lula low. Gold has to drop another 78 per cent to hit the $250 low from 1999. Industrial metals need a similarly big fall.