Asia supplants Europe as focal point of concern about EMs
Last year, emerging market (EM) investors were exceedingly bearish about Europe as the standoff between Russia and the West over Ukraine threatened to dampen growth in the economies of central and eastern Europe and undermine sentiment towards Russia itself.
Towards the end of 2014, investors’ fears were proved right. The rouble, Russia’s currency, plunged 70 per cent against the dollar between early October and mid-December because of a combination of a much tougher western sanctions regime against Russia and a sudden collapse in oil prices.
Emerging Asia, on the other hand, was viewed quite favourably, mainly because the region’s main economies - with the notable exception of crisis-ridden Thailand - were still growing relatively briskly and also because of the enthusiasm generated by the victories of Narendra Modi and Joko Widodo, two reform-minded politicians, in general elections in India and Indonesia respectively.
Fast forward to today and it is emerging Asia which is the focal point for investor nervousness about EMs.
Even before the shock devaluation of the yuan on August 11, sentiment towards the region was deteriorating because of a toxic combination of a sharp fall in exports, mounting concerns about China’s rapidly slowing economy and a sell-off in commodity markets.
The plunge in China’s equity market in the three weeks after shares hit a seven-year high on June 12 and the unexpected devaluation of the renminbi have accentuated fears about emerging Asia at a time when the currencies and debt markets of many economies in emerging Europe are proving relatively resilient.
Since the devaluation of the yuan on August 11, the Malaysian ringgit, the Indonesian rupiah and even the once resilient Indian rupee have been among the worst performing EM currencies. The Hungarian forint, the Polish zloty and the Czech koruna, on the other hand, have been among the best performing, according to Bloomberg.
Over the past year, the ringgit - emerging Asia’s worst performing currency this year which is currently trading at lows last seen during the 1997-98 Asian financial crisis - has lost 30 per cent against the dollar. The decline is almost as severe as the fall in the Turkish lira, one of the most vulnerable EM currencies, and significantly worse than the performance of the South African rand, another vulnerable EM currency.
Throughout the whole of 2014, the ringgit lost only 7 per cent against the dollar - roughly the same performance as in 2013 when EM assets bore the brunt of the so-called “taper tantrum” triggered by the US Federal Reserve’s unexpected decision to begin scaling back its programme of quantitative easing (QE).
The Indonesian rupiah, meanwhile, which is also trading at a 17-year low, has suffered a sharper fall than the rand this year despite the fact that South Africa’s economy is in much worse shape and suffers from a larger current account deficit.
Emerging Asia’s currencies are now the most popular gauges of sentiment towards the EM asset class, just like Spanish and Italian bond yields were during the height of the eurozone crisis in the first-half of 2012.
Still, some perspective is in order.
While emerging Asia’s economies are most exposed to the economic slowdown and policy uncertainty in China - partly through trade linkages but also, more visibly, through financial market ones - the sell-off in currency and equity markets has been just as severe, if not more, in other developing countries.
Commodity-rich Latin American economies have been hit particularly hard. The sharp decline in the price of copper, which has fallen to a six-year low, has caused the currency of Chile, the world’s biggest producer, to drop 17 per cent over the past three months - a sharper decline than those suffered by both the ringgit and the rupiah.
Emerging Europe, moreover, is hardly immune to the sell-off.
Russia and Turkey, the region’s two largest economies, are distinctly out of favour with investors. The rouble has fallen a whopping 36 per cent against the dollar since mid-May while the lira is down 14 per cent.
With increasing signs that the crisis in Ukraine is flaring up again and continued downward pressure on oil prices, the rouble is likely to fall further in the coming days.
As for Turkey, its central bank’s inflation-fighting credibility is in tatters after it disappointed investors on Tuesday by leaving its main interest rates on hold in the face of a sharp drop in the lira and a persistently high inflation rate.
Asia may be the focal point for investor anxiety about Ems, but Europe is by no means out of the woods.
Nicholas Spiro is managing director of Spiro Sovereign Strategy