A Healthy Correction in Emerging Markets
It has been a hard start to the year, especially for emerging markets, but the latest dislocation is a healthy part of the cycle and the risk-on trade remains intact.
January 28, 2014
| By Scott Minerd
Global CIO Commentary by Scott Minerd
The current rout in emerging markets is a healthy turn in the economic cycle. My optimism stems from the fact that when we see weakness, such as this in emerging markets, it can actually have a positive knock-on effect for the global economy.
Pressure on emerging market currencies is disproportionately affecting resource-centric countries such as Brazil, Chile and Russia. As those exchange rates fall, richer nations such as the United States, euro zone countries, Britain, and Japan will enjoy cheaper import prices. China should also benefit from cheaper prices of the natural resources it imports.
In addition, as U.S. Treasuries rally, it brings down mortgage rates in the United States, leading to a pick-up in U.S. housing activity. A robust U.S. housing sector sparks consumer spending and spurs faster overall economic growth in America, which is positive for all economies.
The situation in emerging markets today seems unlikely to derail the global economic expansion. The current market dislocation has more in common with the 1994 Mexican economic crisis, which remained localized, than the 1998 Asian crisis, which threatened to derail the global economic expansion and required myriad bailouts. Despite a rough January, the risk-on environment is intact.
For investors seeking emerging market exposure, the latest swoon is welcome news. Countries such as Malaysia, Indonesia and the Philippines, where valuations last year were expensive based on stock market capitalization to GDP, now present better value.
Sell-Off in EM Currencies Offers Entry Point
After the Fed in December announced plans to taper its asset purchases, currencies in emerging market economies (EM) with large current account deficits have continued to depreciate against the U.S. dollar, with an average depreciation of 2.8 percent. However, as market stress intensifies, investors have become less discriminating on EM assets. Currency values in countries with a current account surplus, which held up relatively well during market turbulence last summer, have declined 4.0 percent since the Fed meeting in December 2013. The bearish sentiment across EM, particularly in countries with strong economic fundamentals, could provide investors with an entry point for compelling returns in the medium-to-longer term.
NORMALIZED WEIGHTED AVERAGE FOREIGN EXCHANGE RATES PER U.S. DOLLAR IN MAJOR EMERGING MARKETS*
Source: Bloomberg, Haver, Guggenheim Investments. Data as of 1/29/2014. *Note: Exchange rates are local currency per U.S. dollar, and are normalized to 100 at the end of 2012. Major EMs with a current account surplus include Hungary, South Korea, Malaysia, Russia, Singapore, Philippines, and Nigeria. Major EMs with current account deficits include Chile, Colombia, India, Indonesia, Thailand, Brazil, Poland, Mexico, South Africa, Turkey, Ukraine, and Peru. Data is weighted by comparable GDP and we exclude EMs with controlled exchange rates such as China and Argentina.
Economic Data Releases
Winter Freeze Disrupts U.S. New Home Sales While Consumer Confidence Climbs
- New home sales decreased 7% in December, and adverse weather likely played a role in the disappointing figure.
- Durable goods orders dropped by 4.3% in December, which was more than was forecasted.
- The Conference Board U.S. Consumer Confidence Index rose to 80.7 in January, the highest level in five months.
- Existing home sales reached a pace of 4.87 million in December, up 1.0% from November’s downward revised figures.
- The Leading Economic Index rose 0.1% in December. Jobless claims, falling building permits, and weaker consumer confidence weighed on the index.
- The FHFA House Price Index ticked up 0.1% in November, the 22nd straight increase, but the smallest since July 2012.
- Initial jobless claims inched up by 1,000 for the week ended January 18th, to 326,000.
Continued Improvement in Data Seen across Europe, China Manufacturing Output Slows
- Euro zone consumer confidence continued improving in January, reaching -11.7, the highest since July 2011.
- The U.K. unemployment rate dropped to 7.1% in November, the lowest in nearly five years.
- The U.K. economy expanded 0.7% in the fourth quarter of 2013, ending the best year since 2007.
- Germany’s ZEW survey of investor expectations unexpectedly fell in January, down to 61.7 from 62.0.
- The euro zone manufacturing PMI reached the best level since May 2011 in January, reaching 53.9 after the fourth consecutive month of accelerating activity.
- Germany’s manufacturing PMI jumped more than expected to 56.3 in January, the highest since May 2011.
- After falling for three months, France’s manufacturing PMI rebounded in January to 48.8.
- China’s HSBC manufacturing PMI dipped below 50 in January, falling to 49.6, the lowest since July.
- Japanese imports rose 25% in December from a year earlier, and exports gained 15% resulting in a monthly deficit of 1.3 trillion yen, a record 18th straight shortfall.
Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”
In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”
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