Throughout 2012 and 2013, emerging markets were seen by many as the best source of growth and profits. And with cheap credit flooding out from the United States due to its quantitative easing program, investors were more than willing to gamble on emerging markets. Now, in some countries a perfect storm is brewing with the tapering of the Fed’s quantitative easing programs, faltering economies, and increasing political unrest.
Market instability hitting countries around the world
Thailand has been slammed with political unrest threatening to undo the government. Following the attempts of Prime Minister Yingluck to have her brother pardoned for alleged crimes, protesters stormed government buildings and disrupted the capital city Bangkok. The benchmark SET index opened the new year with a 5.2% tumble.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
Indonesia, meanwhile, is struggling to maintain the value of its currency. The Rupiah has fallen by nearly 25% over the last year, as economic growth has slowed and analysts have become increasingly worried about debt levels. Yields on government bonds are climbing, while the Indonesian stock market has largely trended downwards in recent weeks.
India, one of the world’s largest economies and home to more than a billion people, is battling through numerous challenges. Rising real estate costs have created fears of property bubbles in major cities, while the rupee has suffered from steep declines. Internally, the private sector remains hampered by government over-regulation, and India’s large democracy continues to be hard to control.
Meanwhile, Brazil’s Indice Bovespa has declined by more than 10% since mid-2013 and has started 2014 with continued turbulence. Once viewed as one of the potential emerging market engines of growth, Brazil has been held back by high costs of doing businesses, protests, and increasing political instability. While Latin America in general and Brazil in particular are rich in natural resources, the key to unlocking sustained economic growth has yet to be uncovered.
U.S. tapering will make emerging markets decline worse
Perhaps most worrisome for the aforementioned economies is that their sell-offs and declines largely came before the announcement of U.S. tapering, and while tapering fears are at least partially to blame, there appear to be other economic forces at work as well. Rising property costs, rampant inflation, bad investments, and other economic activities caused by a dose of over-exuberance in economic growth has caused economies to overheat.
At the same time, the source of the overheating – cheap credit created through tapering – is now coming to an end. As the United States rolls back its tapering programs, emerging markets could suffer from a severe cool-off. With their economies already in decline, the resulting drop could be substantial.