Declines that erased $1.7 trillion (R19.1 trillion) from global stocks as currencies from Turkey to Argentina slid are proving a Wall Street maxim, according to Brian Barish of Cambiar Investors: selling can start anywhere.
“You’re never fully prepared for something like this,” Barish, the president of Denver-based Cambiar, which manages $9 billion, said. “You say to yourself, ‘I know the froth is picking up; I know this is starting to get a little out of hand; this is going to get ugly when the hammer comes down.’ You know all of that, but you just don’t know what is going to get sold and why and by who.”
From Thailand and Russia in the late 1990s to Portugal and Greece three years ago and Turkey and Argentina today, crises in emerging markets are as hard to predict as they are to contain. Now they’re threatening a run of gains that has gone virtually uninterrupted in the developed countries for more than a year as investors adjust to a world where neither China nor the US are likely to ride to the rescue.
The MSCI all country world index, which came within 5 percent of a record high on New Year’s Eve, has dropped 4 percent since January 22, the worst losses for worldwide equity markets in six months.
Turkey’s attempt to stem declines in the lira backfired as a doubling of official interest rates led to even more selling. Stocks tumbled anew during the week as the Federal Reserve (Fed) said it would curtail its bond-buying programme in the second month of reduced stimulus.
“The reasons are always a little bit unexpected,” said Khiem Do, the head of Asian multi-asset strategy with Baring Asset Management in Hong Kong.
Though the causes were obscure, the outcome was predictable, he said. “The correction is long overdue.”
The Standard & Poor’s (S&P) 500 index tracking the biggest American companies fell 1 percent on Wednesday, bringing its decline since the January 15 record to 4 percent. The Turkish currency depreciated as much as 2.4 percent after strengthening about 4 percent during the day. South Africa’s rand sank more than 2 percent even as the central bank unexpectedly raised rates. Gold increased 0.8 percent and copper fell.
The S&P 500 rose 1.1 percent to 1 794.19 points at 4pm New York time on Thursday, after the gauge dropped to the lowest level since November 12. The MSCI Asia Pacific index lost 1.5 percent and the Stoxx Europe 600 index climbed 0.3 percent. India’s rupee weakened 0.3 percent versus the dollar and Indonesia’s rupiah slid 0.4 percent.
Emerging market stocks have had the worst start to a year since 2008 as currencies from Turkey to South Korea tumbled.
Sentiment toward the markets had started to sour last year after the Fed signalled it would scale back stimulus and as China’s economic growth showed signs of slowing. The MSCI emerging markets index has slipped 11 percent from an October peak.
A gauge tracking 20 emerging market currencies has fallen to the lowest level since April 2009.
“It definitely caught people off guard,” Kevin Chessen, the head of international trading and managing director at BTIG-Baypoint Trading, said. “People came into January quite bullish. Then all of a sudden you started to see a few chinks in the armour, and it caused people to scramble. People also don’t have enough protection on like they’ve had in the past. It may be why the sell-off got exacerbated.”
Constant watch
Turkish central bank governor Erdem Basci is fighting to arrest a currency run after a corruption scandal that broke last month ensnared several cabinet members. The political fallout co-incided with an outflow of money from emerging economies including Brazil.
Argentina allowed the peso to plunge 15 percent after the central bank began scaling back interventions in the foreign exchange market a week ago. Global stocks declined 3.3 percent since January 23, when a factory index in China fell short of economist projections.
“The environment is changing so quickly and just to make sense of so many moving parts is extremely challenging,” Benoit Anne, the London-based head of emerging markets strategy at Société Générale, said from New York.
Anne said he woke up at 2am on Wednesday for Turkey’s central bank decision and was awake again at 4am to monitor the market before arriving for work at 7am for a morning meeting.
“It’s almost around the clock,” he said. “It’s extremely stressful.”
All but seven of 24 developing nation currencies fell on Wednesday, with Russia’s rouble and Mexico’s peso losing more than 1 percent against the dollar. The SA Reserve Bank unexpectedly raised the repurchase rate to 5.5 percent from 5 percent, following Turkey’s decision to boost borrowing costs after a late-night emergency meeting.
“If you look at the things that have kicked off over the last two weeks in terms of currency, they are kind of long overdue,” said Gary Dugan, who helps oversee about $53bn as the Singapore-based chief investment officer for Asia and the Middle East at Royal Bank of Scotland Group’s wealth management unit.
“All of these things are well known, but it reached a crescendo that broke the back of the market.” Speculation that developed market stocks were due for a retreat has built for months, including forecasts this month from Blackstone Group’s Byron Wien and Nuveen Investment’s Bob Doll Jr, who both called for a 10 percent drop. The S&P 500 hasn’t lost 5 percent since June. For the MSCI all country index, the broadest gauge of global equities, the last retreat of 10 percent was in June 2012.
Global stocks had surged since mid-2012, with US equities capping a fifth year in a bull market, as the Fed implemented three rounds of quantitative easing and earnings almost doubled.
Ignoring turmoil in emerging markets, the Fed said on Wednesday that it would trim its monthly bond buying by an additional $10bn, sticking to its plan for a gradual withdrawal from departing chairman Ben Bernanke’s unprecedented easing policy.
The emerging markets sell-off has done little to dent the $10 trillion of stock value that was created worldwide last year, when the S&P 500 advanced 30 percent and Japan’s Topix index climbed 51 percent.
“I like days like this,” Carsten Hilck, who oversees about $6.8bn as senior fund manager at Union Investment Privatfonds in Frankfurt, said. “Risk and reward goes together in markets like this. Turbulence makes prices move so I can react.”
This year’s drop in global equities is half as large as the worst retreat of last year, when the MSCI gauge fell 8.8 percent from May 21 through June 24 after Bernanke raised the possibility in Congress of reducing stimulus. It slid 14 percent between March and June 2012 as Europe struggled to extinguish its sovereign debt crisis in Greece and Portugal.
Declines will prove temporary, much as they did in 1998, according to Mark Matthews, the Singapore-based head of Asia research for Bank Julius Baer. Like then, the latest sell-off comes after a five-year advance lifted valuations above historical averages.
The S&P 500 traded as high as 17.4 times annual profit in December, the most expensive level in almost four years, data show. In 1998, stocks rebounded from a 19 percent drop that came as currency turmoil in Asia and Russia spread to developed markets.
The most vulnerable emerging markets “have already reached a bottom in terms of their ‘badness’ “, Matthews said. “Even if they do continue to see economic slowdown, I cannot believe it would be enough to derail the strong US recovery.”
The global economy will grow 3.7 percent this year, up from an October estimate of 3.6 percent, the International Monetary Fund (IMF) said in revisions to its World Economic Outlook released January 21, citing accelerating expansions in the US and UK. Economies of Japan, Europe and the US are forecast to expand together for the first time since 2010, according to data.
A total of 460 stocks in the S&P 500 ended higher last year, the most since at least 1990, according to data. While breadth of that nature has been a bullish stock market indicator in the past, the turmoil in emerging markets this year is leading investors away from equities, according to Jawaid Afsar, a trader at Securequity in England.
“Last year, you could’ve picked any stock at any time and you didn’t need protection because the markets kept going higher and higher,” Afsar said. “Suddenly, emerging markets have tumbled across the board, currencies are getting hit hard, so people are running for cover. It’s come out of the blue.”
Stress in emerging markets has made a winner out of two of last year’s least-loved assets. Treasuries rose on Wednesday, pushing 10-year note yields down to the lowest level in two months. Gold, which posted its worst annual return since 1981 last year, has climbed more than 5 percent last month.
Shifts among asset classes and the global declines this year have led to a surge in volatility. The Chicago Board Options Exchange’s volatility index, known as the VIX, reached 18.14 last month, the highest level since October, and average daily moves in the S&P 500 rose to 0.55 percent, compared with 0.44 percent in December, data show.
“My phone hasn’t stopped ringing in the past few days, and I met with about half of my clients, as some of them have direct exposure to emerging market currencies,” Lorne Baring, who manages about $500 million as managing director of B Capital in Geneva, said.
He added that the firm reduced emerging market exposure prior to the sell-off. “They want to know my views on whether the situation is going to get worse, and I tell them yes, it will.” – Bloomberg