It’s the end of January and global markets are shifting.
In the US and Europe, the stock markets have pulled back 2-3% after a very strong 2013. But emerging markets are down almost 10% after last year’s lackluster returns. What’s going on?
When the Fed announced last June that they were ready to slow the expansion of their balance sheet, emerging markets balked. They had grown accustomed to massive cash-flows from the developed world. With the Fed signaling that the era of ultra-easy money might be ending soon, those capital inflows could slow, threatening their economies.
Now the taper is happening, and some of those economies are facing a cash crunch. Argentina devalued its currency by 10%. Turkey raised its discount rate by over 4%. And emerging stock markets have sold off.
But not all emerging economies are created equal. There’s a world of difference between those with a trade surplus and excess reserves—like China, Korea, and Mexico—and those that rely on imported goods and capital to keep their economies afloat—like Argentina or Ukraine. While currently a wave of “risk-off” selling seems to have depressed them all, such waves and troughs create opportunities when investors move en masse.
In the long-run, quality wins. But sometimes it takes time for markets to differentiate between fool’s gold and the real thing.
Douglas R. Tengdin, CFA
Chief Investment Officer