05/04/2015 00:31 AST
Emerging markets (EM) have had a bit of a rough ride since the mid-2013 ‘taper tantrum’ demonstrated their vulnerability to policy actions overseas, specifically the stance of the US Federal Reserve.
Considering that they were meant to be the trail-blazers — representing the fast-growing alternative to the secularly slowing, so-called advanced nations — that came as quite a shock to the system to many observers.
One key factor that was meant to play to their advantage, and central to the familiar story of the East taking over from the West as the world economy’s locomotive, was the commodity ‘supercycle’, featuring in many an analyst’s research note and institution’s marketing literature.
Not only did it become plain that China could not keep expanding at double-digit annual rates, hoovering up primary resources, nor the Asian region generally in its wake, but the extent to which the Pacific Rim and others had become dependent on cheap money (sponsored by the Fed’s commitment to exceptionally low interest rates for a prolonged period) was a chicken that really came home to roost.
It’s a remarkably dollarized world now, and a phenomenally indebted one too, putting banking, sovereign and even supranational creditors in some jeopardy. Everyone is on tenterhooks as to the Fed’s next move — like an overshadowing albatross with distinctly ‘black swan’ connotations.
For the Gulf, the global doldrums (the US notably aside) have combined with the shale energy revolution to make a massive dent in regional receipts via oil prices, one which cannot easily be consigned as purely transitional. And it is that which tends to keep market sentiment slightly on the back foot even while endlessly easy credit maintains business and investment momentum, GCC governments’ commitment to interim stimulus apart.
At last week’s Middle East Investment Summit in Dubai’s DIFC district, participants received conflicting signals as to what is likely to transpire for the emerging market segment in asset allocation, given both immediate cyclical risks and abiding structural concerns, overlaying the obvious, continuing potential inherent in the developing world.
It’s a critical issue for portfolio managers, given the need to find forms of diversification in the event of a deep shock arising for mainstream, benchmark stock and bond markets. Can there still be pockets of outperformance available for the canny or nimble investor in a situation now where risk seems to be getting ahead of the reward outlook?
As of this moment, “the prospect of rising [interest] rates and the current trajectory of the climbing US dollar portend further weakness in the EM space, such that those “with vivid memories of the 2013 summer sell-off … are content, for the time being, with narrow exposures to the asset class,” confirms Asa Rajan, session chairman and formerly chief investment strategist at Merrill Lynch Wealth Management, responding to queries.
While “contrarians are pounding the table citing stimulative campaigns in many EMs as a preamble for recovering GDP,” that’s not enough to invest upon, considering the “further layers of scrutiny” required in respect of issues, for instance, of financial resilience and credibility of governance, he maintains.
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