This kind of performance hasn’t been seen since 2009.
Bloomberg macro strategist and commentator Mark Cudmore warns that we are now entering dangerous territory for emerging markets, whose “assets may be suddenly hit on multiple fronts at once” noting that “one of the core themes of 2017 has been the resilience of EM. And it’s precisely because of its solid and steady performance all year that pain can intensify so quickly. Complacent longs might soon be questioning what happened.”
He explains why in his full Macro View note below.
Emerging Market Bearishness Can Come at You Fast:
Emerging-market assets may be suddenly hit on multiple fronts at once.
One of the core themes of 2017 has been the resilience of EM. And it’s precisely because of its solid and steady performance all year that pain can intensify so quickly. Complacent longs might soon be questioning what happened.
Between the Fed’s plan to reduce the balance sheet and the dollar’s nascent rebound, the environment is suddenly looking more difficult for EM. But similar macro concerns have been brushed off many times this year. The difference this time is that those macro pressures are being combined with a broad array of idiosyncratic negatives.
Asia will suffer due to a trifecta of rising oil prices, weakening tech stocks and a North Korean problem that appears to be intensifying by the week. That will be compounded by extended holidays in several of the region’s major markets — China, South Korea and Taiwan. And a fear that the Xi Jinping “put” on economic growth in China may expire after the Communist Party Congress in mid-October.
Eastern Europe will be vulnerable to some retrenchment amid political tensions in both Germany and Spain. Greater integration, and hence convergence trades, will be on the back-burner for a few weeks.
As a major energy importer, Turkey is getting hit by the double-whammy of the geopolitical pressure from the Kurdish independence referendum and the related spike in oil prices.
South Africa, with by far the most liquid financial markets on the continent, is seeing a sharp terms-of-trade deterioration, due to lower metals prices but higher energy costs. That’s dangerous for a country with a large current-account deficit, minimal growth, high unemployment and a volatile currency.
Latin America will feel the pinch from weaker metals, but also suffer a deleveraging blow from yet another U.S. domestic policy failure.
From all sides, EM is likely to start feeling the pressure. And as long-time EM traders know well, sometimes the liquidity you saw on the way in just isn’t there on the way out.
The iShares MSCI Emerging Markets Indx ETF (EEM) was unchanged in premarket trading Tuesday. Year-to-date, EEM has gained 28.01%, versus a 12.39% rise in the benchmark S&P 500 index during the same period.
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