Worse to come for EM stocks, says ADIA
March 21, 2014
The Abu Dhabi Investment Authority — one of the world’s biggest sovereign wealth funds — casts doubt on the buying opportunities in emerging markets
Emerging equities have further to fall, Abu Dhabi Investment Authority’s head of internally managed equities, Greg Eckersley, has told LatinFinance.
Eckersley said the sell-off from emerging markets has meant some attractive valuations of companies ADIA likes, which he said could be a good opportunity for longer-term investors. But Eckersely said it was not yet “time to call the bottom” of the market for emerging equities.
Valuations of consumer-orientated stocks may have traded too high to sustain investors’ interest as domestic demand changes, said Eckersley – but he was uncertain whether this meant it was the best time to buy export-orientated stocks.
“Rate hikes and currency devaluations will have a natural impact, but the policy response takes time, and I’m not sure [policymakers] have taken all the necessary steps,” he said. “So far many emerging markets have tried to prove there is no problem and they don’t need to react.”
Eckersley gave India and Indonesia as examples of countries that have acted, and where investors were buying back in (by February, Indonesia’s stock index was up 6% year to date). But in Brazil, Eckersley said the reaction was more ambiguous.
“The central bank [in Brazil] has managed a difficult situation well, but it’s all about the policy environment post-election. Ahead of the elections I doubt much will change,” he said.
This contrasted with the view offered by Jan Dehn, head of research at emerging-market fund manager Ashmore. Dehn said countries like Brazil had already adjusted for a longer-term rebound. Local currency bonds were trading far above a level justified on the basis of US rate expectations, he said.
“They’ve all raised rates, devalued their currencies, and adjusted fiscal spending,” Dehn said. “Emerging markets don’t have the structural rigidities [of developed markets]. They don’t have huge benefits systems, and they have very flexible labor markets. They adjust very quickly.”
But February’s recovery in emerging market asset prices was a dubious rebound, and unlikely to be sustained, he said, as it was predicated on weak US economic data and dovish comments from Federal Reserve chairwoman Janet Yellen — whose more recent comments were seen as relatively hawkish.
“The ‘end-of-the-emerging-markets-era’ trade is still there. The underlying rationale [for the sell-off] has not been countered.”
Bankers described novel support tactics necessary to push through equity market transactions after the sell-off. In the debt markets, analysts said rate differentials could still attract investors to local currency bonds, but external issuance would drop.
“With the winding down of QE we’ll probably have higher interest rates and higher financing rates than the ones we have enjoyed in the past few years,” said Michel Janna, Colombia’s director of public credit. “But it’s the new equilibrium; it’s the new reality and we have to be ready for that.” LF
Latin America’s capital markets are facing a sell-off in emerging markets as indiscriminate as the bull phase it succeeded. But as returns dwindle, asset buyers will have to become more discerning
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