Emerging Markets Sink as Currencies Capsize
By Hal M. Bundrick
NEW YORK (MainStreet)--Emerging market equities have been pummeled lately and investors are faced with a decision: get out before it gets worse, or buy into the weakness. The currencies of India, Brazil and Indonesia have taken the greatest amount of pain since early May.
"The declines accelerated sharply in recent weeks, leading to something approaching panic in several markets last week," says Sam Wardwell, strategist with Pioneer Investments in a research note. "Much of the sell-off is probably due to the increasingly panicky retreat of 'hot' money that moved into these currencies seeking yield when the Fed pushed U.S. rates down -- emerging market bond mutual funds have seen large redemptions. A second possible culprit/contributor is weakening fundamentals, as slowing growth in China ripples through the commodity-export-oriented economies of ASEAN countries."
Hugh Hendry, who manages the Eclectica Absolute Macro hedge fund, has struggled to break even this year. He blames the lackluster performance on the Fed."As in the children's nursery rhyme, the Fed chairman infamously marched his troops to the top of the hill only to march them down again, one moment promising tapering, the next, unlimited accommodation," Hendry says. "Having retreated in June, global stocks stabilized and then posted their best monthly performance in a year and the dollar swooned." Hendry says global central banks are continuing to struggle with weak local fundamentals. "The bankers are promising that rates will remain at low levels for an extended period of time but the markets, with an eye on improving economic conditions, are yet to be convinced," Hendry says. "Many countries are still dealing with worsening fiscal and current accounts, depleting reserves and high inflation. This combination forced several emerging market central banks to hike interest rates as they try to contain capital out flows. Turkey's central bank raised the benchmark rate to 7.25% in July for the first time since October 2011, tightening local monetary conditions to appease international creditors." But Wardell notes there is a notable exception to the pattern of currency weakness: Chinese currency which has risen "modestly but steadily" against the dollar over the past four months.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV