National Post (National Edition)
Worst yet to come for emerging markets
A man is silhouetted against the sun as two women hold a Turkish flag, standing in a silent protest at Taksim Square in Istanbul on Tuesday. Violent social unrest in emerging economies like Turkey and Brazil coupled
with slowing economic growth is also sapping life from the countries markets. ford of UBS, for example, said the recent bout of volatility has made some stock markets particularly appealing, even if emerging markets as a whole present an uncertain investment environment.
“Emerging Europe, Middle East and Africa equities in aggregate appear cheap versus average valuations and versus global emerging markets,” he said. “However, the cheapness is largely the result of Russian energy and utilities. Markets like South Africa and Turkey and sectors like health care, consumer staples and consumer discretionary are expensive.”
Larry Kantor, head of research at Barclays, agrees there are some potential bright spots if investors take a more nuanced look at emerging markets.
“For example, we expect Mexican equities to rebound as energy and fiscal reforms move forward,” he said. “Korea also looks relatively cheap. Its economy has absorbed the appre- ciation of its currency against the yen quite well.”
Even Mr. Lapointe, who warns of structural problems in certain emerging market countries, sees a potential rebound in the coming months..
“A number of emerging market currencies and equities now look somewhat oversold,” he said, noting that makes a near-term bounce likely as markets adjust to what the U.S. Fed announced this week.
But Mr. Lapointe warned that such a bounce shouldn’t be a reason to be optimistic about emerging markets in general. He points out the structural problems these countries face are severe, and that they have a mountain of obstacles to overcome even if the stronger-than-expected recovery taking shape in the U.S. continues.
“Some take the view that emerging market growth tends to lag developed world growth and therefore expect emerging markets to be net beneficiaries from this phenomenon,” he said. “We have broadly taken the other point of view, thinking that to the contrary, the end of U.S. private-sector deleveraging and the marginally tighter Fed policy that comes with it provides the catalyst for accidents in some emerging economies.”
Those “accidents” will be pullbacks in emerging market assets as a confluence of events tests such economies this year.
In addition to the Fed’s tapering, which many market watchers now predict will likely begin in September, emerging markets face the prospect of lower commodity prices as China’s growth retreats to its slowest pace in 14 years. On top of that, a strengthening U.S. dollar has led to deflation pressures in some economies, a phenomenon that may be further accelerated by China’s slowdown.
In Mr. Orford’s words, it’s been a “tough year and it isn’t over yet.” to normal and until that happens the risk of a painful correction in housing will remain.
According to Mr. Johnson, such concerns are overblown. However, he acknowledges bank shares will remain under pressure until consumer debt comes back down.
“For the past year, people have been worried about headwinds the Canadian banks are facing in terms of [consumer] debt and mortgage lending,” said John Kinsey, a portfolio manager at Caldwell Securities Ltd. in Toronto.
On top of that, he said, slumping commodity prices have put a damper on activity in mining and energy, which in turn is slowing activity at the banks’ capital markets operations.
The situation has attracted attention in the U.S., where some hedge funds are betting the Canadian housing market, and the banks and maybe even the loonie as well, are headed for a painful correction.
Earlier this month, New York Times columnist Paul Krugman opined that Canada could be facing “a big deleveraging shock despite its boring banks.”
He added, “Of course, people have been saying this for several years, and it hasn’t happened yet — but remember, the U.S. housing bubble took a long time to pop, too.”
TD economists took the unusual step of publicly rebutting Mr. Krugman’s comments, arguing in a report that the Canadian and U.S. housing markets are quite different and that Canadian households should be able to deleverage without getting into trouble.
And, it should be pointed out, the real estate market seems to be gradually stabilizing, much as the banks are hoping.