Welcome to The EM Rattlesnake Round-Up

Welcome to the EM round up.

It happens once or maybe twice a year. This year, it started on the first day of January but soon erased losses into February, not without weakening stomachs during the interim. Then we had a massive rise till about now where we are seeing a mini rout again which is strangely led, in currencies, by the sometimes-EM-sometimes-DM Australian dollar.

EM currencies and economies are a contradiction. We all know how promising they are, with ripe, young populations full of potential, undervalued real estate for the same potential which is the potential to consume, to buy and create value and a value chain that will perpetuate, leading people into the neverending cycle of debt that our own economies are based upon. Incidentally, that is sometimes known as the wealth effect.

On the other hand, we all cannot but help feel how unsustainable EM countries are, with rampant corruption, injustice, rife abuse of power in their tepid democracies and we can well imagine that half their populations would be gladly willing to give up all just to have a chance to go live in anywhere in Europe or Australia or Canada or the USA.

The critics of EM live in a frustratingly dark place, because they are wrong most of the time as the markets would prove to them. But for their rants, they get it right once or maybe twice a year when the markets correct. Like we are in the midst of a correction right now with the currencies of Brazil, Columbia and South Africa over 3% lower against the USD, Turkey and South Korea over 2% and the rest between 1-2%.

When EM markets correct, it does the full works. For there is no such thing as a hedge in bonds for equities and such. Bonds, equities, currency all must go ! Like a mighty cheap sale.

The role of the central bank is ONLY to HIKE because no one cares if they ease. Easing is done out of the major economies and EM economies then rely on these inflows to fund their deficits. Local rate cuts are generally bad for EM because weaker currencies spell bad for inflows unless if it is in the case of India and Indonesia where new governments buy a new lease of hope (for a year or two) along with the promise of deliverance for the country.

Year to date, MSCI EM Equity Index is still holding up.

MXEF INDEX DAILY YTDGraph : MSCI EM Equity Index Year to Date

Same for the MSCI EM Currency Index.

MXEF CCY INDEX DAILY YTDGraph : MSCI EM Currency Index Year to Date

And in the larger scheme of things, we are still sitting on fat profits if we look over the years.

MXEF INDEX MONTHLYGraph MSCI EM Equity Index over 10 years

MXEF CCY INDEX MONTHLYGraph MSCI EM Currency Index over 10 years

The backbone of emerging markets are the BRICS – Brazil, Russia, India, China and South Africa, followed by the MIST – Mexico, Indonesia, South Korea and Turkey.

Out of these, we only have 2 greenshoots – India and Indonesia, both with new political leaders. Mexico and South Korea are holding steady while the rest are in various states of declining growth.

It is not looking bright yet markets choose to start the correction this year in September which reminds me of the US annual rattlesnake round ups. Fatten for the slaughter.

It is easy because markets are rarely short the EM and the only position is long or neutral as far as “hot/fast” money flows go – it is too expensive and illiquid to short for a prolonged period.

Thus the round ups for the hedge funds and professional investors to cull which gives others a good entry point and August has, in the past 10 years, been the round-up month, falling 7 out of 10 times except for 2014, 2006 and 2005.

The impending FOMC meeting is also a pretty good excuse to stage a correction for that will soon be followed by the ECB QE programme details next month.

I examined a list of EM economies and their GDP growth along with their budget deficits, inflation and unemployment numbers. The verdict is that they do need quite a bit of inflows to plug those budget numbers whilst growth is not terribly exciting for most of them (using >6% GDP growth as benchmark).


Is it any wonder that investors are moving into the Frontier markets these days, doubling up their risks for the promise of better returns ?

Beggar nations cannot be choosers and can only hope for the ECB to pick up where the Fed will soon be leaving off. Yet Abenomics also failed to deliver the inflows last year. Why ?

Because even I, looking at those numbers, know that rallies would be short lived. And those analysts are all way smarter than me.

And so we leave the EM markets under “hot” money supervision and control, pushing them up for the “rattlesnake” cull and I expect that this one may drag out a little longer as QE transitions from the Fed to the ECB.

Thus EUM US, a Proshares Short MSCI EM ETF, is likely to bounce higher, off its 2 year lows, to target $25.50 into the Brazilian elections on 5 Oct.