Emerging Markets: Lock, Stock and Barrel

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At one time it was the tough that got going when things started to get rough. Now, it’s just the money-minded that look, watch, and act before you know what has hit you. It’s not the tough that get going, you’d have to be a fool to stick to the investment in the emerging markets right now. Today, it would appear that the biggest outflow of financial investment since 2011 is currently taking place in emerging markets. The money is on its way elsewhere in the belief that the reduction in Quantitative Easing will bring about a slow-down now in the economies of the emerging markets.

• According to newly released statistics by EPFR Global, emerging market equity outflows increased by $6.3 billion in just one week (last week of January 2014).
• That’s the highest withdrawal of investment since August 2011.
• If we take January 2014 alone, then there has been an outflow to the tune of $12.2 billion in the month.
• Bond funds in emerging markets have also seen a fall in January 2014 that amounts to $4.6 billion.
• There is a very high chance that emerging markets shall now see a greater reduction as the world’s stock markets will be having the worst start to the year (and that means the worst since 2009 and the height of the financial crisis).

Stock markets are now waking up (with the hangover) from Quantitative Easing and the false buoyancy of the financial markets kept artificially afloat (while doing nothing to stabilize employment or create improvements in the economy that would be long-term effects). This has been coupled in an arranged marriage that can only end in divorce now that China’s economy is slowing and there are more than just signs of a downturn in currencies for Russia, and Turkey as well as Argentina and South Africa, for example.

• The Dow Jones has dropped by 5.3% since the start of the year.
• January saw the first loss at the start of the year since 2009.
• History repeats itself; we all got the gist of that long ago. Trouble is, we just never learn.
• The NASDAQ has gone down by 1.5% since January 1st.

It might be a good bet to take the January reading as a good tell-tale sign of the rest of the year. The stock market looks as if it will fall and January’s reading has been right in 73% of the cases since 1929.
The VIX (Volatility Index) increased by 26% in January 2014. Some are saying that the worst is still yet to come and this time it might be more than just scare-mongering that gets the better of you. Only 23.8% of people in a recent poll at the end of January (the American Association of Individual Investors Sentiment Survey) believed that the stock market would not go any lower. Complacently sit back, join the other bulls and the stampede will ensue as the market won’t be able to sustain you. The figure is a great deal lower than the all-time historic average that stands at 30.5% who believe that the market will go down.

The International Monetary Fund has already rung the alarm bells expressing the need for a coherent macroeconomic policy to deal with the volatility of emerging markets. Slower growth and falling currencies are bad news for the emerging markets, looking like good news for the USA. But, does the US worry about the effect that its policies are having on the economies of the rest of the world? Perhaps not immediately. But, then again, since when did the Federal Reserve actually think ahead with foresight?

• China’s growth will slow to 7.5% for 2014 according to the International Monetary Fund, but it could be as low as just 4% (Lombard Research).
• The EU might start worrying about that since it exports to the value of $212 billion to the USA (2012).
• The USA exports some $128 billion.

Estimates show that if China’s growth were to fall to 3% it would mean a reduction in global GDP to the value of1.5%. Good side of the coin would mean that oil prices would fall by 30% and base metals by as much as 40%.

But, it’s true to say that emerging markets might be going down the tubes these days with the withdrawal of investment almost lock, stock and barrel. People are scrambling to get out of there before it goes down any more. But, there are certainly right there the bucks to be made by buying up while they are low. Emerging markets might suffer right now, but that can only be temporary. Without the emerging markets, we can’t do a lot. They will have to go back up again at some time or the other.

Originally posted: Emerging Markets: Lock, Stock and Barrel

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