THE SHORT VIEW By John Authers
THE SHORT VIEW By John Authers
Published: July 18 2006 03:00 | Last updated: July 18 2006 03:00
Copyright The Financial Times Limited 2006
A rising tide raises all boats. But in the markets, a wave can also swamp all the boats. This phenomenon appears to have been at work in the emerging markets in recent weeks.
The flare-up of violence in the Middle East is ample justification for an increase in risk aversion, which will tend to trigger a move to relative "safe havens". Emerging markets as an asset class could be expected to fall. But the term "emerging market" covers a wide variety of jurisdictions, so there is a possibility that the wave of risk aversion will leave some value in its wake.
The latest figures from Emerging Portfolio Fund Research of Boston suggest that the renewed violence in Lebanon and Israel came just as investors' money had started to return to the emerging markets following May's correction. In the week to July 12 - just before the Israeli strikes on Hizbollah targets in Lebanon - more than $1bn (£545m) flowed into emerging markets funds, according to EPFR.
Much of this came from US retail investors, and followed eight weeks of outflows. This has not proved to be a well-timed re-entry. Among countries not directly affected by the violence in the Middle East, Mexico's IPC index is down 9 per cent in the last two weeks, Brazil's Bovespa is down almost 7 per cent and India's Sensex is down about 8 per cent. Turkey, closer to the epicentre of the global concerns, is down almost 10 per cent.
The fixed income markets have been much more sanguine. Last week saw the average spread of emerging markets bonds over treasuries rise by only about 7 basis points, according to JPMorgan's EMBI Plus index, from 211.8bps to 218.2bps. A more positive read on this is that emerging markets exhibit all the classic symptoms, despite the added interest and investment over the last few years, of being an inefficient market. This should create opportunities for those with very strong stomachs.
For example, Turkish bonds are trading at 287 basis points above US treasuries, according to JPMorgan, while Brazil trades at a spread of 254. With Turkey running a current account deficit of about 6.5 per cent, and Brazil a surplus, Brazil could give better value.
Published: July 18 2006 03:00 | Last updated: July 18 2006 03:00
Copyright The Financial Times Limited 2006
A rising tide raises all boats. But in the markets, a wave can also swamp all the boats. This phenomenon appears to have been at work in the emerging markets in recent weeks.
The flare-up of violence in the Middle East is ample justification for an increase in risk aversion, which will tend to trigger a move to relative "safe havens". Emerging markets as an asset class could be expected to fall. But the term "emerging market" covers a wide variety of jurisdictions, so there is a possibility that the wave of risk aversion will leave some value in its wake.
The latest figures from Emerging Portfolio Fund Research of Boston suggest that the renewed violence in Lebanon and Israel came just as investors' money had started to return to the emerging markets following May's correction. In the week to July 12 - just before the Israeli strikes on Hizbollah targets in Lebanon - more than $1bn (£545m) flowed into emerging markets funds, according to EPFR.
Much of this came from US retail investors, and followed eight weeks of outflows. This has not proved to be a well-timed re-entry. Among countries not directly affected by the violence in the Middle East, Mexico's IPC index is down 9 per cent in the last two weeks, Brazil's Bovespa is down almost 7 per cent and India's Sensex is down about 8 per cent. Turkey, closer to the epicentre of the global concerns, is down almost 10 per cent.
The fixed income markets have been much more sanguine. Last week saw the average spread of emerging markets bonds over treasuries rise by only about 7 basis points, according to JPMorgan's EMBI Plus index, from 211.8bps to 218.2bps. A more positive read on this is that emerging markets exhibit all the classic symptoms, despite the added interest and investment over the last few years, of being an inefficient market. This should create opportunities for those with very strong stomachs.
For example, Turkish bonds are trading at 287 basis points above US treasuries, according to JPMorgan, while Brazil trades at a spread of 254. With Turkey running a current account deficit of about 6.5 per cent, and Brazil a surplus, Brazil could give better value.
posted by Carlos T Mock at 9:06 AM
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