"Up until a few months ago, emerging markets were widely heralded as the next great “growth engine” that would drive the global economy forward as the ailing economies of the U.S., Europe and Japan took a back seat in the wake of the global financial crisis. Unfortunately, the events of recent months have sent emerging market assets reeling and capital pouring out even faster than it flowed in.
When the most acute phase of the global financial crisis came to an end in mid-2009, record-low interest rates in the U.S., Europe and Japan encouraged investors to move their funds into higher-yielding emerging market assets. In the past four years, $4 trillion worth of capital has flowed into emerging markets, helping to inflate bubbles in bonds, property and, to a lesser extent, equities.
In late 2012, two of the world’s most powerful central banks launched aggressive monetary stimulus programs that helped to fuel a parabolic rally in non-BRIC emerging market stocks – the U.S. Federal Reserve’s $85 billion per month QE3 and the Bank of Japan’s deflation-fighting "Abenomics" program.
The first EM sell-off catalyst, which arose in March and April, was rising expectations of a tapering or slowing of the Fed’s QE3 program by late-2013.
Secondly, in mid-May, markets began to doubt the efficacy of the BoJ’s Abenomics program, sending the Nikkei down by over 20% in less than a month while causing the yen to rally, which punished carry traders who borrowed cheaply in yen to invest in high-yielding EM assets. By the end of May, violent Turkish protests and the rapidly-declining South African rand pushed emerging market assets over the edge, sending them into a tailspin for the rest of June. Again global markets panicked as China experienced a sharp credit crunch in mid-June after their central bank cracked down on the nation’s shadow banking system.
Rising taper expectations and fund outflows have pushed global bonds into a bear market, popping what many people consider to have been a global bond bubble , causing U.S. 30-year bonds yields to rise from 2.8% to nearly 4%, and 10-year note yields to rise from 1.6% to nearly 3% in the past four months. Climbing U.S. bond yields have caused emerging market bond yields to surge in lock-step, slamming EM bonds down by an average of 12.8% as investors removed over $20 billion of their capital.
Early 2013's best-performing emerging stock markets have fallen very sharply , with Turkish stocks plunging by 30%, Indonesian stocks by 25%, Thai stocks by 20%, and Philippine stocks by 20% since the start of the rout, as over $20 billion of capital has been pulled from EM stocks.
The torrent of liquidity flowing out of emerging markets has caused sharp declines in those countries’ currencies, the worst being the Indian rupee’s 22% plunge against the U.S. dollar that brought it to all-time lows. In addition, the Turkish lira has seen a 21% decline, the Brazilian real is down 16%, and the Indonesian rupiah is down 13%. The common denominator among the EM countries with the hardest-hit currencies is that they each run current account deficits in the range of 2-7% of their GDP.
Rapidly depreciating EM currencies are causing their import prices to rise, leading to inflation.
Other emerging market economies are slowing down dramatically as well. In an effort to shore up their sliding currencies, emerging market central banks are raising interest rates, which will be the catalyst that eventually pops the numerous EM credit and property bubbles when combined with rising bond yields".
Source: Jesse Colombo
Yahoo Finance
When the most acute phase of the global financial crisis came to an end in mid-2009, record-low interest rates in the U.S., Europe and Japan encouraged investors to move their funds into higher-yielding emerging market assets. In the past four years, $4 trillion worth of capital has flowed into emerging markets, helping to inflate bubbles in bonds, property and, to a lesser extent, equities.
In late 2012, two of the world’s most powerful central banks launched aggressive monetary stimulus programs that helped to fuel a parabolic rally in non-BRIC emerging market stocks – the U.S. Federal Reserve’s $85 billion per month QE3 and the Bank of Japan’s deflation-fighting "Abenomics" program.
The first EM sell-off catalyst, which arose in March and April, was rising expectations of a tapering or slowing of the Fed’s QE3 program by late-2013.
Secondly, in mid-May, markets began to doubt the efficacy of the BoJ’s Abenomics program, sending the Nikkei down by over 20% in less than a month while causing the yen to rally, which punished carry traders who borrowed cheaply in yen to invest in high-yielding EM assets. By the end of May, violent Turkish protests and the rapidly-declining South African rand pushed emerging market assets over the edge, sending them into a tailspin for the rest of June. Again global markets panicked as China experienced a sharp credit crunch in mid-June after their central bank cracked down on the nation’s shadow banking system.
Rising taper expectations and fund outflows have pushed global bonds into a bear market, popping what many people consider to have been a global bond bubble , causing U.S. 30-year bonds yields to rise from 2.8% to nearly 4%, and 10-year note yields to rise from 1.6% to nearly 3% in the past four months. Climbing U.S. bond yields have caused emerging market bond yields to surge in lock-step, slamming EM bonds down by an average of 12.8% as investors removed over $20 billion of their capital.
Early 2013's best-performing emerging stock markets have fallen very sharply , with Turkish stocks plunging by 30%, Indonesian stocks by 25%, Thai stocks by 20%, and Philippine stocks by 20% since the start of the rout, as over $20 billion of capital has been pulled from EM stocks.
The torrent of liquidity flowing out of emerging markets has caused sharp declines in those countries’ currencies, the worst being the Indian rupee’s 22% plunge against the U.S. dollar that brought it to all-time lows. In addition, the Turkish lira has seen a 21% decline, the Brazilian real is down 16%, and the Indonesian rupiah is down 13%. The common denominator among the EM countries with the hardest-hit currencies is that they each run current account deficits in the range of 2-7% of their GDP.
Rapidly depreciating EM currencies are causing their import prices to rise, leading to inflation.
Other emerging market economies are slowing down dramatically as well. In an effort to shore up their sliding currencies, emerging market central banks are raising interest rates, which will be the catalyst that eventually pops the numerous EM credit and property bubbles when combined with rising bond yields".
Source: Jesse Colombo
Yahoo Finance
