Emerging markets are havens amid rout

JPMorgan’s Amoa says it wasn’t a taper tantrum, while UBS’ Wong dismissed the sell-off as a mere blip


LONDONEven as global markets suffered the worst bout of turmoil in years, commentators from JPMorgan Chase & Co to UBS Group AG said developing nations would ride out the storm.

JPMorgan’s Diana Amoa said it wasn’t a taper tantrum, while UBS’ Geoffrey Wong dismissed the sell-off as a mere blip, predicting a quick rebound. Others, like Ashmore Group plc’s Edward Evans, insisted emerging markets (EMs) were well supported by earnings growth.

For a while, it looked like they were wrong. As market after market got sucked into the sell-off, emerging stocks erased US$1.83 trillion (RM7.21 trillion), losing in two weeks what Italy’s economy produces in one year. Valuations fell to a 10-month low and the benchmark index erased its 2018 gains. A 10% correction ensued.

But it looks as though EMs came out of it looking better than their richer counterparts, especially the US.

As the dust settles on the selling spree, here’s what emerged:

While fretting over the US, Europe and Japan, derivative traders were the least concerned about EMs. Expected volatility, derived from options prices, rose by a smaller degree in developing nations since Jan 26 than in the developed world. Given that prices typically move in the opposite direction to volatility, EMs may be the least impacted by a global rout in the near term.

The world’s second-largest economy saw its equities lose more than US$1 trillion, as much as the entire Brazil market, in the past two weeks. Almost 80% of all EM losses during the period was in China’s neighbourhood, covering India, South Korea and Taiwan.

The declines elsewhere were negligible compared to the size of the plunge in these markets.

The only country to see its market capitalisation rise was Egypt, which is reaping the rewards of a currency float.

Some of the biggest and deepest markets in the developing world suffered the worst meltdowns. Almost oneeighth of China’s stock market vanished, while South Korea and South Africa lost about a tenth of theirs. In contrast, tiny markets such as Pakistan and Egypt outperformed others.

Those who had bet that the most expensive EMs would witness bigger losses than lowervalued peers got a jolt. The roll call of the biggest losers included

some of the cheapest markets in the world: Russia, South Korea and Hong Kong-listed Chinese shares. They were already trading at single-digit price-earnings ratios before the rout, and sank to mouth-watering levels thereafter.

Whether one might look at the futures market as a signal for expected moves in spot prices, or merely as a reflection of current sentiment, the signs of panic there were unmistakable. Near-month futures on the MSCI Emerging Markets Index fell to the biggest discount to the benchmark in seven years as the sell-off took hold. That meant traders saw potential for annualised losses of as much as 39%.

But then, the hysteria evaporated as quickly as it had emerged. The futures index swung to a premium, the widest since September 2013. The fluctuations seemed to have settled by Monday and futures traded higher than spot prices.

Price charts suggested the first support for EM stocks would come in at a level where the 100-day moving average of the equity gauge met the 23.6% Fibonacci retracement of the two-year rally. The index entered that range last Friday and rebounded on Monday. Unless equities trade below the threshold in a sustained manner, the worst of this phase may be over for EMs. — Bloomberg