/ 7 February 2014

No respite for emerging markets

Mellow yellow: Gold saw a slight rise and held firm this week and the SPDR Gold Trust said its holdings rose by 3.89 tonnes on Tuesday.
Mellow yellow: Gold saw a slight rise and held firm this week and the SPDR Gold Trust said its holdings rose by 3.89 tonnes on Tuesday.

One might have been forgiven for assuming that some catastrophic world event was upon us earlier this week when both emerging and developed markets saw a calamitous rout.

The capital flight from emerging markets has become somewhat the mode du jour as developed markets regain some footing and United States Federal Reserve governor Ben Bernanke hands over the baton to Janet Yellen to continue the retreat from quantitative easing.

But the shock came in a double whammy: developed markets, too, began to flag noticeably, with everything from Japan's Nikkei to the US's Standard & Poor's 500 dipping into negative territory.

On Tuesday, the MSCI Asia excluding Japan dropped 1.4% to a fresh five-month low. The Nikkei saw its worst performance in seven months, losing 4% by about 9am.

In Europe, things were also looking grim with the index of its top shares losing about 0.7%.

In the US, the S&P 500 index sank to its lowest levels since June last year and the Dow Jones shed more than 2% in the day, having lost more than 7% since the beginning of the month.

Catalysts for the mass retreat
Two data releases served as catalysts for the mass retreat. First, a privately released report on US factory data showed weaker than expected figures.

Growth in the number of new orders had plunged to its lowest in 33 years and factory activity was at an eight-month low.

The news triggered investor fears that the US economic recovery was not as advanced as thought. Money flowed out from that market — but not into the emerging markets that have been ready recipients for the past five years.

The largely dual-listed JSE felt the domino effect of the move. On Wednesday afternoon, the FTSE/JSE Top 40 had lost value for 11 consecutive days and was at 39 912 points.

The second piece of news signalling the movement was China's announcement last Saturday that manufacturing activity had slumped to a five-month low.

"China's high growth rate over the last five years has been fuelled by debt, to the point that we could see … another type of bubble burst," Jean Pierre Verster, an economist at 36ONE Asset Management, said. "Deteriorating economic data coming out of China is a serious concern to global participants."

The traditionally "safe" territory
Investors scrambled into traditionally "safe" territory. The price of gold increased slightly, holding firm at just above $1 250 an ounce on Wednesday.

SPDR Gold Trust, the biggest gold-backed exchange-traded fund in the world, told Reuters that its holdings had risen 3.89 tonnes to 797.05 tonnes on Tuesday.

Money flowed out of most countries in Europe but German government bonds, traditionally seen as a safe haven, saw an uptick, with 10-year yields seeing a six-month low on Wednesday as markets contemplated the possibility of the European Central Bank extending its stimulus.

The number of US treasury notes rose as well, with 10-year-note yields reaching their lowest levels in three months on Tuesday.

The volatility S&P500 index (VIX index) peaked at 21.5 points, a high since June, on Tuesday before dropping to 19 points on Wednesday afternoon.

"All these price movements are indications of increased risk aversion and increased nervousness," Verster said.

The herd is on the move
Stock market indices in the US and Asia have rallied somewhat since Tuesday but the early plummet this week reveals hypersensitivity in the markets at a time when investors are trying to predict the future effect of quantitative easing.

Despite knocks such as this week's to the developed markets, emerging markets continue to bear the brunt of the sentiment.

"The herd is on the move at the moment," Verster said. "It's not yet in panic mode but there's definitely indiscriminate selling taking place."

According to Warren Dick, an analyst for Trillian Asset Management, South Africa's economic frailties could send investors running faster from this country than from other emerging economies.

"A weak economy doesn't entice equity investors," he said. "New car sales are down, fuel costs are going up, administered prices are surging above inflation, you've got a properly indebted consumer. It's almost like the perfect storm."

Reserve Bank governor Gill Marcus said at a Bloomberg-hosted conference on Monday that the Fed needs to take into account the effect that tapering was having on the emerging economies.

"When the advanced economies were really at the depth of the crisis, it was the emerging markets that helped stabilise, that helped create some balance to the global outlook," Bloomberg reported her as saying.

"The challenge here is if the advanced economies say, okay, you are on your own, the scale of the emerging markets is such that it's going to impact on this fragile recovery."