By Tim Seymour
I just got back from a week in the islands and tried to escape the chorus of emerging market bears. It’s been a nasty week and emerging markets has been near the top of the loser board, but the reach of journalists and voices of marginal observers of emerging markets found its way to me on a quiet beach in the Caribbean.
Yeah, I know emerging market fund flows have been nasty and that there has been a yield aggression trade going on for years that led to people to believe all credits were the same, that the commodity boom would go on forever, and that corporate governance in Brazil (EWZ) or Russia (RSX) was as good as the USA.
There are many examples of the “irrational exuberance” of emerging markets debt market. See oversubscribing to Rwanda 10-year paper at the peak of the market. On May 2, Rwanda brought a 10-year deal that was well oversubscribed to yield 6.625%. Those bonds today now yield 8.55% and are going higher.
And in some cases emerging market equities were well over their skis. Places that offered a shred of domestic growth became crowded trades on the equity side.
But to say at this point of a move down - where emerging market currencies have been battered to smithereens - that fund flows and the Fed tapering risk mean emerging markets has only begun to suffer makes me scratch my head.
Emerging market currencies, which are the basis for the fund flows, as investors are borrowing in currencies like U.S. dollar or yen or euro and investing in local bond markets or equities throughout emerging markets, are at levels they have not seen in years, possibly decades.
Yeah, that’s right.
As you look around at core emerging markets you can quickly see the charts, which tell you currencies are cheap, even relative to Fed policy. Emerging market currencies are well through the levels they were trading before the Fed began its post-crisis crack binge.
Emerging market currencies are trading at cheaper levels with significantly higher USD reserves, and in most cases, much better balance of payment statistics.
The Russian Ruble outside a period around the peak of the ’08 crisis hasn’t been this cheap since Russia was in crisis.
The Ruble traded with a 23 handle leading up the housing/credit/Lehman events of 2008. It is now at levels it never even hit during the Russia crisis of 1998.
That’s right, at 32.88 to the USD, outside a spike in October of 2008 the rub has never been this weak.
The South African zar clearly has problems. The country has a 6% current account deficit, major labor issues, a commodity bubble that has popped and a market where it is easy for foreigners to come and go quickly.
But the zar is now trading at levels it has not seen since ’02, again outside the shock spike of Fall 2008.
The Brazilian real is at ’05 levels; this list goes on. Emerging market currencies have been a beneficiary of fund flows into local bond markets but to say that this recent rout hasn’t more than made up for “Fed liquidity levels” is not accurate if looking at the charts.
It should also be noted that the move lower in emerging market currencies is hardly something that has happened in the last six weeks. This is a move that has been building over the last 18 months.
I’m not here to tell you that emerging markets fund flows won’t be challenging while global panic sets into rates and fund flows.
But to say that negative sentiment hasn’t become a little over the top is to not be calling it straight.
People who can’t find Rwanda on a map are making bold prognostications on the death of emerging markets. This is often the best time to be sifting through the rubble and building a shopping list.