Bloodbath in Emerging Markets
Stocks and currencies in emerging markets have been hammered this summer. The same applies for the commodity market. The past week Wall Street has also gotten caught in the downdraught.
The Chinese summer has been scorching hot, and has offered a stock market crash and poor macroeconomic figures. Recently, the rigid fixed exchange regime has also been softened up, which has resulted in a drop in the currency of a few percent. Many fear that this is just the beginning.
The Russian ruble has plunged 40 percent this summer. The collapse has been caused by the decline in the oil price in combination with renewed sanctions. Macro statistics have also been poor with a GDP drop of nearly five per cent year on year.
Turkey is struggling on its side with political instability, terrorism and an incompetent government in the finance field. The Turkish lira is sinking like a stone in spite of the fact that the country is benefiting from falling commodity prices.
Brazil also stands with both feet planted in the quagmire. The president has her hands full with a gigantic corruption scandal and is threatened with impeachment, while the economy suffers from weak commodity prices, high inflation and a wounded currency.
On the surface it seems like the problems in the various emerging economies are unrelated and country specific. However, there is a red thread tangled through everything: arrogance.
For politicians, the prolonged boom after the new millennium became a pretext for doing nothing, especially in large and powerful countries like Russia and Brazil. Reform efforts stalled, and corruption increased.
The prevailing problems are therefore primarily structural and not cyclical. This requires structural solutions.
Politicians are rarely eager to make structural reforms as they are often painful and unpopular in the short term, while gains often lie many years ahead. Take Russia as an example.
In addition to fighting corruption, Putin should liberalize the economy and implement large-scale privatizations. The danger is, however, high that privatizations and liberalization will be followed by mass layoffs when private and profit-oriented owners take over control and make companies more efficient.
The question is whether Putin dares to make himself unpopular in the short term when he knows that the benefits lie far in the future. Few politicians like to take such chances.
The foregoing makes us wary of emerging markets. In contrast, for European equities, we believe the prevailing weakness might represent an opportunity.