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Emerging Markets Take A Tumble; The Tightening Starts Before It Even Begins
Perspective | 30 August 2013
By: Gabriel Gan
Articles (41) Profile

It sure looked like the end of the world for investors in certain parts of the world as stock markets in emerging economies took a huge beating with some of these indices falling into bear market territory.

What are the emerging markets and who are they?

At the start of the new millennium, a group of countries – Brazil, Russia, India and China – became the investors’ darling due to the high-growth nature of their economies. We now know that China has catapulted itself into the world’s number two economy in the world although we cannot ignore the economic might of the rest when combined.

Soon after, Indonesia joined the ranks of BRIC to form BRIIC while South Africa, too, joined in the party to be collectively termed BRIICS. These markets have enjoyed a spectacular bull run but were all hit when the US financial crisis in 2008 blunted the edge of these economies. Their fortunes were revived when Federal Reserve (Fed) chairman Ben Bernanke first introduced quantitative easing in November 2008 followed by another few more rounds of money-printing exercises to jumpstart the US economy.

The commodities super cycle that started with the growth of China took a big hit when the Chinese economy fought inflation in 2009 but demand for energy and resources soon made countries such as Australia, Brazil, Indonesia, Russia and South Africa very rich as they rode on the cycle.

While quantitative easing helped to inflate financial assets in the US, it helped to keep alive prices of commodities although prices of precious metals and resources that are intrinsic to infrastructure development were under pressure from slowing economic growth.

We can safely assume that cheap money printed by the American printers helped to push up stock prices and also artificially fuelled speculative, not real, demand for commodities.

Jakarta Nosedives!
With this in mind, the smart investors have probably thought that cheap money used to jack up commodity prices will invariably cause prices of the same assets to plunge once the printers are decommissioned. Hence, we can probably explain why the Jakarta Composite Index fell from a high of 5,251 points on 21 May (Did Ben Bernanke say something back then?) to 3,967 points on 27 August. The 1,284 points plunge, or some 24.4 percent, firmly qualifies as a bear attack! The index has now fallen into bear market territory and may fall even more depending on how much cheap credit will be taken off the tables of the financial system.

To make matters worse, the weakening rupiah is reminiscent of 1997 when the collapse of the currency resulted in skyrocketing debt and inflation so much so that the rupiah was compared to the “banana note” in Malaya during World War II!

India’s Growth Days Over
Once touted as the next China, India’s heydays seem to be over after economic growth fell by half in merely two years from double-digit growth to a mere 5 percent in 2013. The falling rupee and rising inflation form a huge challenge that the government needs to tackle, and challenges for the currency and economy has translated into losses in the stock market.

A major triple-top formed in February, May and July this year has put the Sensex under a lot of pressure with the index now losing some 2,300 points from its peak of 20,351 points in July. It is desperately holding onto 18,000 points which, if failed, will probably see the index move towards 16,000 points. Should this happen, it can only mean that the rest of the Asian markets would have suffered the same fate caused by a mass exodus of funds from Asia to elsewhere.

Sabai, Sabai, No More!
The Thai economy is definitely not in such a mood after falling into a recession under the stewardship of Prime Minister Yingluck Shinawatra. The Thai economy fell 0.3 percent in the second quarter following a 1.7 percent contraction in the first quarter, largely reflective of weak domestic demand and the end of large-scale infrastructure projects that pump-primed the economy.

From a high of 1,649 points in May, the SET is now trading at 1,275 points – a huge 374 points away from the peak – falling into bear market territory.

Blame It On The Printing Machine?
There is a sense of hopelessness in some Asian markets – the “peripheral ones” – after the bloodbath. Why did some markets fall more than the others?

Asian economies that report slowing or negative growth have been punished very harshly while major markets like Hong Kong, China, Japan and Singapore have not been badly hit. It is likely that hot money, which is the result of cheap credit, has decided to take flight believing that Asia will be hit the hardest once cheap credit is no longer available and, worst still, when interest rates finally rise.

Most importantly, hot money will soon be returned to the Fed when stimulus measures are trimmed or ended in the future. This looks like the trend for the foreseeable future, confirming what I have been forecasting despite strengthening economic fundamentals in the US.

Investors are too reliant on cheap credit and money borrowed to fund speculative activities must soon be returned hence the flight from Asia.

At this point in time, investors do not want the economy to recover because it will spell a sooner end to Quantitative Easing III. We have arrived at a conclusion, and that is economic fundamentals are still not able to wean investors off the stimulus addiction.

Beware Of September!
The Hungry Ghost Festival has done it again! We failed to escape from the clutches of past fates when markets fell during the lunar seventh month!

If you think that we have had enough, think twice because we are in for a very volatile ride in September starting from 4 September when the US will announce job creations in the private sector for the month of August followed by the non-farm payroll and unemployment figures on 6 September. This will wreak havoc in the stock market as strong data will more or less confirm that the Fed will start tapering from 17 to 18 September during the FOMC meeting.

Even if the Fed does taper, investors will be trying to second-guess the market by speculating on how much of the US$85 billion will be reduced. Investors are now looking at the Fed to trim to US$70 billion a month. Anything more, the stock market drops and anything less will still lead to investors worrying about when the next tapering will come and when the complete exit will arrive.

Lots of things to worry about so sit tight.

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