Weak links in emerging markets show as dollar strengthens
Dubai: The renewed dollar strength has thrown open a pandora’s box and has given a vital insight to fund managers: don’t paint the emerging markets with the same brush.
The MSCI emerging market index has been almost flat so far in the year, but the stock market in Turkey has lost 18 per cent of its value in the same time period due to current account deficit and fiscal along with political issues.
“Emerging markets, unlike developed markets, are less straight forward because we have some countries which have idiosyncratic issues, where we have got weak currencies leading to governments having to introduce procyclical monetary policy and increase interest rates at a time when growth is slowing,” Mark Burgess, deputy global chief investment officer told Gulf News in an interview at their office.
Turkey’s stock index has fallen along with the lira this year amid a sell-off in emerging markets and after rating agencies and the International Monetary Fund warned that government stimulus measures were overheating the economy.
“In Asia we have many economies which have sorted their financial position out, and they don’t need external financing as they used to,” Burgess said. He does not expect a continued recovery in the dollar, which otherwise is a negative for emerging markets.
Columbia Threaneedle likes Japanese and European markets, and has been neutral on the United States equities and underweight on the United Kingdom.
The fund manager has levelled out their positions in India in favour of Asian equities-ex Japan more dominated by China in its multi assets funds.
“We had the India position for a number of years. We singled out India because certain characteristic came through in terms of margin expansion, profitability,” Toby Nangle, global head of asset allocation at Columbia Threadneedle said.
India’s benchmark Sensex index has gained 4.6 per cent so far in the year compared to a 8.6 per cent loss in Chinese equities. Their multi asset fund has about 16 per cent in cash, which is “quite high,” to anchor their risk balancing, Nangle said.
State Street Global Advisors feels that the dollar strength is a headwind for emerging markets and not necessarily a drawback.
In emerging markets, there exist weakest links in the form of Turkey or Argentina, whose currencies have been beaten down by 20 and 34 per cent respectively so far in the year, making them the world’s worst performing currencies.
But others have been implementing policies to curtail their current account deficit after the taper tantrum hit them.
“The reason for that [dollar as a headwind and not drawback] EM over the past number of years have implemented very prudent policies and the reaction has been fairly contained, and that is certainly evident that we have seen so far,” David Furey, Senior Portfolio Strategist in the fixed income, cash and currency investment team, at State Street Global Advisors said.
“The difference between now and taper tantrum would be that we see a lot of progress by these countries on deficits be it fiscal or trade. There are outliers in these like Argentina and Turkey,” Furey said.
State Street Global Advisors find Asian and European countries “quite attractive” due to strong fundamentals absence of any structural imbalances.