Emerging markets moving towards a bear market

THE rebound in emerging markets over the past five days has failed to dispel concern there is more bad news ahead.

Anshu Jain, the former coCEO at Deutsche Bank, said some developing nations hurt by plunging commodity prices and an outflow of funds remained a worry. That was after Fortress Investment Group told investors that emerging markets were at the start of a bear market that could rival the Asian financial crisis of 1997.

In certain parts of Asia, excluding Japan, China and India, there could be some bad news, Mr Jain said at Bloomberg Markets Most Influential Summit 2015 in London yesterday. He also pointed to SA, Brazil, Russia and Turkey as emerging markets that harbour risks.

The sell-off in emerging markets, which began in June, has led to a credit contraction that will last until at least March 2017, according to a letter to investors in Fortress Convex Asia Fund, signed by Singaporebased chief investment officer David Dredge, as well as fund comanagers Nicholas Heaney and Andy Wong. Fortress said it had used past economic cycles as a guide in evaluating the market.

“Our view is that we are in the beginning stages of the next contractionary cycle, and this cycle, similar to 1997 to 1998, is commencing on the emerging market side of the global imbalance,” Fortress wrote in the investor letter last month.

The MSCI Emerging Markets index fell 19% last quarter, the biggest loss for the stock benchmark since 2011.

Fortress is not alone among money managers forecasting uncertainty for emerging markets. Ray Bakhramov of Forum Asset Management pointed to analogies between the current environment and the 1997 Asian financial crisis.

Ray Dalio’s Bridgewater Associates said the effect of emerging market losses was likely to be more widespread than in the 1980s and 1990s because investors had more money invested in developing markets.