Christmas has come early. The US Federal Reserve is making all sorts of conciliatory noises on the m...
Christmas has come early. The US Federal Reserve is making all sorts of conciliatory noises on the monetary policy front and the euro is becoming positively headstrong with gains three days in a row for the first time in months. To top it all, the oil price is easing back below $30/barrel as Iraq's threat to halt supply is lifted. There's only a couple of weeks to go but we might get the year-end rally after all.
However, anyone invested in emerging markets is going to be chewing their nails over the festive season. The whole asset class has been a major disappointment this year, but the last two months have put sentiment back almost to where it was in the depths of the 1998 financial crisis. Asia made such progress in 1999 that the upheaval almost seemed to be a figment of the imagination.
But this year, the necessary government and corporate reforms needed to get the region moving stalled. Whether through exhaustion or complacency, problems like debts, fiscal weakness and delays to good practice surfaced again. Foreign investors, with better options elsewhere, decided to exercise them and come back when impetus to reform picked up again.
But it hasn't. Asia's problems, like those for most emerging markets, have been compounded by rising US interest rates, the strengthening dollar and more lately, a falloff in demand from the US, which constitutes the main export market for many. Volatility on Nasdaq, the US technology index which drives the performance of the sector worldwide, has had a major negative impact.
Through the year there have been "wobbles" in several emerging markets. Korea was shaken by the problems at Hyundai and Daewoo, Malaysia and the Philippines have had ongoing political ructions, Peru's beleaguered president faxed his resignation to his legislature from his holiday home in Japan, Argentina produced a mini debt crisis and Poland is sinking in the weight of its current account deficit.
However, the sector saved the best 'til last. The collapse of Turkey's bond and equity markets in the last two weeks has sent a shiver of dread down the spines (yes, they have them) of many investors. It started when Deutsche Bank dumped $1.5bn worth of domestic bonds on the market, having decided that the Turkish banking sector was ready to implode, and that the government wasn't being direct enough about the sector's problems. Overnight rates instantly doubled and bond yields soared. The equity market lost 35% of its value in 10 days.
The bombshell was all the more damaging because only two months earlier Turkey had got a clean bill of health from the IMF, and appeared to have the bad debts of the banking sector under control. Now Turkish investors feel the IMF has betrayed them and indignation is running high. Hopes that other developing countries would escape contagion from the Turkish crisis were in vain.
When this affects somewhere like Ecuador, it's their problem. But when it hits Russia, it is ours. There is a good chance that Russia won't stump up a debt repayment due in January, and will be declared in technical default, due to a "misunderstanding" with the IMF. Russia applied to delay the payment so it could use the money in its forthcoming budget, and assumed the postponed would be granted. It hasn't. The IMF says Russia made plenty of money out of oil revenues in the last year, and must pay up. The bond markets are already on edge. Are we ready for another Russian default?
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