Analysis: Time to return to emerging markets?
November 23, 2015, 6:16 pm

Global investors are relieved that an imminent US rate hike on the back of an improving economy will likely be slow-paced [Xinhua]

Over the past year, currencies in emerging markets have plummeted, some by more than 50 per cent devaluation.

But things may be improving, a number of analysts have said.

Last week, we reported that JP Morgan analysts predicted that emerging markets will see better economic growth in the coming quarters.

Now, Goldman Sachs, UBS Securities, Bank of America and Barclays – to name a few – all believe that emerging markets, such as Mexico, China, India and Russia. may have turned the corner from a three-year drag which reversed their honeymoon growth rates in the wake of the 2008 US subprime mortgage financial crisis.

“2016 could be the year EM [emerging markets] assets put in a bottom and start to find their feet. There is the prospect of improved growth and better returns, even if it is not a rerun of the roaring 2000s,” a Goldman Sachs investment report said last week.

The report appeared to echo similar sentiments from International Monetary Fund’s chief Christine Lagarde.

At the height of worries over China’s economy in August and September, she warned that the major challenge facing the global economy is that growth remains moderate and uneven.

“For the emerging market economies, prospects have weakened in 2015 relative to last year, though some rebound is projected next year. For both the advanced and emerging economies, productivity growth continues to be low,” she told reporters following a meeting of senior finance officials from G20 countries in Ankara, Turkey.

Again … the Fed

The Federal Reserve’s hesitation to raise interest rates in September, despite often rampant market speculation that it would, has been a boon for some emerging markets.

But most are now banking on a rate hike at the end of December or early January. And, if Fed chief Janet Yellen’s words are anything to go by, the hike will be very gradual.

This is likely the optimal scenario for emerging markets looking to regain the heyday market shares of 2008 and 2009.

From their perspective, the US is a valuable market destination for their commodities; as rates slowly go up, consumer and investor confidence will slowly rise, thereby strengthening America’s appetite for imports.

This in turn raises confidence in emerging economies that they will find markets for their wares.

But the emerging market slump began in earnest when the Fed began to taper off its quantitative easing stimulus program until it terminated it in September 2014.

By then capital flow into emerging markets was reversed; funds started to flow back into the US after it ended its stimulus scheme, and the values of emerging market currencies started to gradually fall.

EPFR Global, a US-based firm that tracks the flows and allocations of funds domiciled globally, had alarm bells ringing when it found that emerging markets between January 1 and February 1 of 2014 had suffered an outflow of $12.2 billion in equity.

Between June 3 and June 10, 2015, outflow from emerging economies reached $9.3 billion – most of it from Asia. This was the highest outflow total in seven years.

The Financial Times reported last summer that the outflow may have reached as high as $1 trillion in just the past 13 months.

Draghi the hero?

Europe is also a major market for exports from emerging economies.

European Central Bank (ECB) chief Mario Draghi’s hint last week that he is set to increase the Eurozone’s stimulus program and/or extend it beyond its original deadline was welcomed in emerging markets since it signals that there will be more liquidity.

Like the Federal Reserve which launched its stimulus program in 2009, the ECB in March 2015 started buying back government bonds that were purchased by the banks.

This in turn creates more money in circulation in the Eurozone economies.

It is tantamount to printing more money and is used by most advanced nations as a means to revitalizing the economy when existing monetary policy proves to be inadequate.

The bond-buying – or QE – mechanism involves the ECB buying back 60 billion euros ($65 billion) every month until the program terminates in September 2016 – a total stimulus of 1.1 trillion euros.

It therefore provides banks with more funds to use for loans to finance projects and fuel investment.

If the ECB does indeed vote on December 3 to increase the amount of bond-buying there will likely be more liquidity in the markets.

This increases the probability that this ‘extra cash’ will be re-injected into emerging markets such as Mexico, Turkey, Egypt, India, China and Russia.

According to Euromoney Institutional Investor Company CEIC emerging markets comprise 40 per cent of the global economy – a significant rise from 24 per cent just 10 years ago.

But challenges remain – a stronger US dollar and volatile energy markets with oil prices fluctuating could keep foreign emerging markets investors at bay in the interim.

By Firas Al-Atraqchi for the BRICS Post with inputs from Agencies