For many specialist emerging markets fund managers the shakeout witnessed across emerging markets in the past three of four months has offered welcome respite from a period of exuberance where deep pockets where worth more than investment expertise.
A protracted bull run, the most spectacular ever witnessed by the asset class, has halted, or at least paused, as the Federal Reserve considers how high interest rates must go to contain inflation. Some investors greet the turbulence as an opportunity to distinguish themselves.
“It’s fine, you just have to be careful what you invest in,” Simon Treacher, of Bluebay Asset Management, told delegates at an EMTA meeting.
After an initial spell of sharp and indiscriminate declines in currencies and equities, differentiation has begun to appear with countries like Brazil and Russia forging ahead of Turkey and South Africa. Treacher says he’s wary of central Europe, noting that the ratings agencies could punish Slovakia in the coming year after taking action against Hungary. Little-known Russian banks coming to market may also be a trap for foreign investors, he cautions.
Susanne Gahler, a manager at F & C told Emerging Markets that the sell-off has created pockets of value, adding that she’s considering forays into South Africa and Mexico. However, the general market conditions show little signs of improving.
“Looking forward for the next 12 months what we expect on the external debt side is more of the same, a drag from the US treasuries side and very little prospect of further spread tightening,” Gahler said. “The kind of returns, or rather no returns we’ve seen may well be with us for the rest of the year.”
Money markets are unsure whether Ben Bernanke and his fellow governors will bolster US rates for an 18th straight meeting in August. Meanwhile the European Central Bank is in line for an increase and the Bank of Japan looks likely to end its zero interest-rate policy. The uncertainty, and risk that global growth may suffer in the fight against inflation has taken its toll on risky assets.
“The asset price correction we’re seeing, I think has further to run,” said HSBC’s chief emerging markets economist Philip Poole. “My belief is we have further to go in the tightening cycle and are not about to stabilize until it’s clear that the synchronised tightening of the G3 is approaching the top.”