The big news this week is the gurgling sound everybody heard as money drained out of emerging markets and headed home to the USA. That’s thanks to the US Federal Reserve threatening to turn off the easy money spigot sometime this year.
Bloombergreported that money is moving back into US shares at the fastest pace on record. Net result: emerging market stocks and currencies took a spanking.
Such is the power from controlling the US money supply and interest rates. It’s amazing to think of the effect the Federal Reserve can have on millions, both money and people, everywhere.
However, it’s the task of today’s Money Weekend to wonder if Ben Bernanke and friends might have created an interesting buying opportunity…
Cashing in the Casino Chips
More on that shortly. The first thing to note is the one country that managed to miss the trouble this week: China. HSBC’s manufacturing survey even scraped over the line to show expansion.
CNBC also pointed out that the yuan has held steady over the last month against the US dollar. Compare that to the central banks of India and Brazil. They scrambled to prop up their currencies. The Brazilian real and Indian rupee traded at all-time lows against the greenback this week.
Unfortunately, the story isn’t much better for the Australian dollar. The distress in the emerging markets is showing up here. The poor old Aussie dollar is now down over 13% for the year, according to MoneyBeat.
They say the dip under US90c was partly because 76% of Australian exports go directly to Asia and because the Aussie is a proxy for less liquid Asian currencies.
That’s another way of saying that, for a developed nation, we’re in the slipstream of global trends affecting the BRICs and South East Asia. For now, money is shifting out.
That has shown up in the fall of the Aussie. Will it show up with selling in the stock market that will drag the index down?
You’d think so, in the short term at least. If you ask our value investing expert Greg Canavan, the answer is a definite yes. Here’s what he told his subscribers this week:
‘The point is, you’re seeing global capital flow back into the US, not because the US economy is improving, but because the punters are cashing in their chips and getting out of the casino. That this is going on during what looks to me like a pretty convincing topping formation is a major cause for concern.’
You can see how he thinks it might play out in Australia in more detail here.
By the look of it, Greg is right when he says it’s less to do with the ‘improving’ US economy. That’s if you look at where a big chunk of the selling is coming from. According to the Wall Street Journal, the answer is ‘mom and pop’ investors in the US. They’re not just worried about the Federal Reserve removing the juice. They’re also getting spooked about slowing Chinese growth dragging the world down with it.
Check it out from the WSJ this week:
‘Retail investors have led the summer stampede out of emerging-market stocks, bonds and currencies, pulling almost twice as much money as institutional investors such as insurance companies and pension funds…
‘Since the start of June, retail investors have pulled $18.1 billion from emerging-market bond funds, about one-third of the amount they had put in since the financial crisis, according to fund tracker EPFR Global. By comparison, institutional investors have pulled $9.3 billion, or about 10% of their postcrisis inflows. The same pattern can be seen in the stock market, where retail outflows continue even as institutional investors have largely stopped selling.’
The Long Term Bet You Can Make
The takeaway for us is there’s nothing like a bit of a panic to get share markets down to a clearing level. This looks like a good chance to find some compelling value outside Australia if you’re happy to take a position for the long term and ride out the inevitable volatility. That’s how you buy low and sell high.
It’s not as if emerging markets are going to fall off the map. Ask fund manager Jeremy Grantham. He manages $100 billion out of Boston. He sees emerging markets as still the engine of growth over the next seven years.
Source: GMO
Or take this from the Wall Street Journal article we mentioned earlier:
‘[Retail] investors are behaviorally doing the exact opposite of what they should be doing," said Steve Blumenthal, whose advisory firm manages $550 million for investment advisers and retail clients. "Emerging markets have perhaps the best valuation level of any of the markets, but they’re in a selloff.’
Of course, you’ll never be able to pick the exact bottom. And emerging markets are a pretty broad bunch of countries, from Turkey to India to Brazil. It probably pays to be a bit choosy if you can. India, for one, looks like you should give it a wide berth for a while.
We mentioned a few weeks ago in Money Weekend how our colleague Nick Hubble has been hunting the growth story in South East Asia. He calls them the ‘Tiger Cub’ economies. He measures each country, alongside cheap valuations, by a key ingredient. If you’re looking for ideas on which markets and ETF’s to investigate, you can check out what he’s got to say here.
We could be wrong, but it’s hard not to see this as a great chance to pick up value on the cheap. At the very least, it’s worth a look.
Callum Newman+
Editor, Money Weekend
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