Absolute Return September Letter
A case of broken BRICS?
“When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity.”
John F Kennedy
Whilst many chose to spend August on the beach, a full-blown crisis developed across emerging markets, and the BRICS in particular. The ‘B’ got into trouble with its currency under severe pressure. So did the ‘I’ and the ‘S’, whilst the ‘R’ and the ‘C’ both experienced loads of bad news on the economic front. Not exactly what you have come to expect from the BRICS.
The first seven trading days of September have offered all of these markets some much needed breathing space with EM currencies, bond and equity markets all doing considerably better. It is thus tempting to conclude that this was just another one of those summer hiccups that have become the norm in recent years. I do not buy that argument for one second, though. There are some very sound fundamental reasons why the crisis erupted now, which we will get into a little bit later.
Perhaps most surprisingly, though, the EM crisis didn’t (and still doesn’t) get a huge amount of media coverage. I suspect that, when you come up against a human disaster like the one which is currently unfolding in Syria, a currency crisis tends to be somewhat overlooked. The use of chemical weapons is a much better news story than collapsing foreign exchange rates and, as we all know, the world’s media are so utterly one-dimensional that they can only deal with one crisis at a time.
Now, I am not for a single moment suggesting that what is going on in emerging markets is more important than the unmitigated human tragedy in Syria. Far from it; however, the reality is that the financial system is a cynical beast. It doesn’t really care much about human disasters. Even political crises, however dramatic, tend to have only a passing effect on markets. No, what really matters to the markets is a good old fashioned financial crisis.
Before I go any further, please accept an apology. This letter is late, very late. We try to publish the Absolute Return Letter within the first five days of the month, but there is just too many things going on at the moment. It is also quite a short letter this month. It looks long but, in terms of word count, it is one of the shortest I have ever written. You may actually find that liberating!