West bites emerging economies
Category: Europe, U.S.A., Asia-Pacific
By David Macfarlane
Economic developments in Europe and the US are affecting investments into emerging markets in terms of money flows, says Angus Tulloch, head of Asia Pacific (ex-Japan) equities at First State Stewart.
Emerging economies were to some extent very strong beneficiaries of quantitative easing (QE), particularly resource companies. As a result, Mr. Tulloch says: “The money isn’t coming in to the same extent and that has had an impact, particularly on resource prices and resource-dependent economies such as Brazil, and more recently Australia. And not only on their stock markets but on their currencies as well.”
Martin Lau, director, Greater China equities, also at First State Stewart, points out that the impact on emerging markets is coming from liquidity or sentiment. “If you look at the cycles for emerging markets over the last three or four years – when the US and then Europe went through downturns on the credit cycle – a lot of emerging markets have actually leveraged up quite considerably based on the cheap money. So a lot of hot money has flowed into India, Thailand, and Indonesia – if you look at the GDPs in many emerging markets, they’ve actually gone up quite considerably over the last three-to-five years, whereas in Europe and the US it’s gone down from a very high level.”
He continues: “I think this kind of difference in the economic cycle means that just as people believe that the US is starting to recover and that the worst is over in Europe, then people may choose to invest into those developed markets and even question whether some of those emerging markets have actually over-leveraged themselves on the way up, which has resulted in a number of current account deficits. The general consensus right now is that it’s better to focus on developed markets, as emerging markets are more risky.”
In terms of how this is affecting portfolios, Mr. Tulloch says: “If you’re taking a long-term view, you would find some of the companies in India very attractive at the moment – but we haven’t been very enthusiastic about the outlook for the rupee because the government hasn’t been doing the right things. But you can protect yourself if you buy companies which are exporters, and also companies which have cash in the balance sheet – benefitting from the higher interest rates that are required to protect the currency – you’re not going to suffer too much as long as the government, at the end of the day, does make the right moves with infrastructure and various bottlenecks in the country.”