Emerging markets have hit the headlines lately as one
of the main causes of recent turbulence. Business editor Dene
Mackenzie finds out why and discovers an alternative investment
option - frontier markets.
Last year was a dreadful year for emerging market assets and
there has been no respite this year as volatility spread to
emerging market equities bonds and currencies, Milford Asset
Management senior analyst Stephen Johnston says.
Investors had been pouring out of emerging markets in
response to the tapering of the quantitative easing policy by
the United States Federal Reserve, together with concern
China, the world's second-largest economy, was heading for a
''hard landing'', he said.
Last week, the Fed eased its bond-buying programme by another
$US10 billion ($NZ12.16 billion) a month, taking it down to
$US65 billion. Since 2008, the Fed has spent $US3 trillion on
propping up the US economy.
Emerging market countries such as Turkey, South Africa and
Brazil, that depended on cheap foreign capital to finance
current account deficits, had been particularly vulnerable to
the withdrawal of policy stimulus in the US, seeing their
currencies depreciate significantly, Mr Johnston said.
A drop in currency value was of concern to emerging market
companies borrowing money in foreign currencies.
Turkish corporates held more than $US160 billion in foreign
currency-denominated debt and the plunge in the lira had
pushed up their debt repayments which would affect their
Harbour Asset Management adviser Christian Hawkesbury said
while both the Reserve Bank and the Fed met market
expectations with their scheduled policy decisions, the real
focus of markets had been on emerging market volatility.
That served as a reminder that even in a global economic
expansion, there were risks.
''Over recent months, emerging markets have experienced
considerable market volatility as investors have grown
nervous about how they will cope with a withdrawal of
monetary stimulus from the Fed.
"It is a useful reminder that even in a global expansion,
economies and markets seldom move in a straight line,'' he
Late last week, emerging markets recovered on from a sharp
sell-off as Latin American stocks and currencies gained and
Russia's ruble and Turkey's lira rebounded after policymakers
pledged to take any necessary measures to stabilise their
markets. But investors remained worried the respite would be
Traders said recent panic selling had abated for now as
markets priced in the current pace of stimulus withdrawal by
China's economic slowdown, however, left investors cautious
after an index of business conditions for Chinese
manufacturers dipped for the first time in six months.
Many emerging countries, including Brazil and Chile, greatly
rely on commodities exports to China, which makes their
currencies vulnerable to further losses should China, the
world's second-largest economy, disappoint forecasts.
''China risk has risen, and US Treasury yields have fallen''
since the beginning of the year, David Lubin, chief emerging
market economist at Citi, wrote in a research note.
''The net effect is to create a reminder that weak emerging
markets still face a rather hostile environment for their
Citi forecasts real exchange rates to rise further in weak
developing countries with ''unfinanceable current account
deficits'' in order to cool down domestic consumption and
Turkey and South Africa were among countries that hiked
interest rates last week, with only an initial limited impact
on investor sentiment.
Currencies eventually steadied as central banks from Istanbul
to Moscow and Brasilia took new measures or stepped up verbal
intervention to shore up their markets.
The ruble came off a record low against the euro and its
lowest level in nearly five years against the dollar after
the Russian central bank said it would make unlimited
interventions if the exchange rate strayed outside its target
Mr Johnston said Milford had a small allocation to emerging
markets but the firm was ''much more excited'' about the
prospects for frontier markets.
Frontier markets tended to be countries less developed, with
lower incomes than emerging markets.
''In effect, they are up-and-coming emerging markets. It is a
relatively new opportunity set for investors with the indices
only launched in 2007.''
The index included a diverse range of countries such as
Kuwait, Qatar, Vietnam, Nigeria and Bangladesh, he said.
Frontier markets rose 24% in US dollar terms last year while
the mainstream emerging market index fell nearly 3%.
The exciting thing about frontier markets was they had many
of the same characteristics seen in emerging markets before
they had their big boom in their stock markets.
''Broadly speaking, the frontier market story is one of
catch-up and convergence with what has occurred in emerging
''The attraction of frontier markets includes a strong
economic growth outlook, young and growing populations, rapid
growth in middle class, increasing foreign investment and low
government debt levels.''
From a market perspective, they also offered diversification
benefits as frontier markets had low correlations to emerging
and developed markets and low correlations to each other, Mr
Foreign investors had small allocations to frontier markets,
making them less vulnerable to periods of market distress.
While emerging markets and developed markets had experienced
a torrid time recently, frontier markets continued to shine,
Include: Brazil, Chile, Colombia, Peru, Egypt, Greece,
Hungary, Poland, Russia, South Africa, Turkey, China, India,
Indonesia, Taiwan, Thailand.
Include: Argentina, Jamaica, Bosnia, Bulgaria, Croatia,
Romania, Botswana, Ghana, Kenya, Morocco, Zimbabwe, Oman,
Palestine, Qatar, Saudi Arabia, United Arab Emirates,
Bangladesh, Pakistan, Vietnam.