Declines that erased $1.7 trillion
from global stocks as currencies from Turkey to Argentina slid
are proving a Wall Street maxim, according to Brian Barish of
Cambiar Investors LLC.
“You’re never fully prepared for something like this,”
Barish, president of Denver-based Cambiar, which manages $9
billion, said in a phone interview. “You say to yourself, ‘I
know the froth is picking up, I know this is starting to get a
little out of hand, this is going to get ugly when the hammer
comes down.’ You know all of that, but you just don’t know what
is going to get sold and why and by who.”
From Thailand and Russia in the late 1990s to Portugal and
Greece three years ago and Turkey and Argentina today, crises in
emerging markets are as hard to predict as they are to contain.
Now they’re threatening a run of gains that has gone virtually
uninterrupted in the developed countries for more than a year as
investors adjust to a world where neither China nor the U.S. are
likely to ride to the rescue.
The MSCI All-Country World Index, which came within 5
percent of an all-time high on New Year’s Eve, has lost 3.6
percent since Jan. 22, the worst losses for worldwide equity
markets in six months. Turkey’s attempt to stem losses in the
lira backfired as a doubling of official interest rates led to
even more selling. Stocks tumbled anew yesterday as the Federal
Reserve said it would curtail its bond-buying program in the
second month of reduced stimulus.
“The reasons are always a little bit unexpected,” said
Khiem Do, head of Asian multi-asset strategy with Baring Asset
Management in Hong Kong. Though the causes are obscure, the
outcome was predictable, he said. “The correction is long
overdue.”
Global Retreat
The Standard Poor’s 500 Index (SPX) tracking the biggest
American companies fell 1 percent yesterday, bringing its loss
since the Jan. 15 record to 4 percent. The Turkish currency
depreciated as much as 2.4 percent after strengthening more than
4 percent during the day. South Africa’s rand sank 2.5 percent
even as the central bank unexpectedly raised rates. Gold
increased 0.9 percent and copper fell.
Emerging-market stocks have had the worst start to a year
since 2008 as currencies from Turkey to South Korea tumbled.
Sentiment toward the markets had started to sour last year after
the Fed signaled it would scale back stimulus and as China’s
economic growth showed signs of slowing. The MSCI Emerging
Markets Index has slipped 10 percent from an October peak. A
Bloomberg gauge tracking 20 emerging-market currencies has
fallen to the lowest level since April 2009.
Not Prepared
“It definitely caught people off guard,” Kevin Chessen,
head of international trading and managing director at BTIG-Baypoint Trading LLC, said by telephone. “People came into
January quite bullish. Then all of a sudden you started to see a
few chinks in the armor, and it caused people to scramble.
People also don’t have enough protection on like they’ve had in
the past. It may be why the selloff got exacerbated.”
Turkish central bank Governor Erdem Basci is fighting to
arrest a currency run after a corruption scandal that broke last
month ensnared several cabinet members. The political fallout
coincided with an outflow of money from emerging economies
including Brazil.
Argentina allowed the peso to plunge 15 percent after the
central bank began scaling back interventions in the foreign-exchange market last week. Global stocks declined 2.8 percent
since Jan. 23, when a factory index in China fell short of
economist projections.
Constant Watch
“The environment is changing so quickly and just to make
sense of so many moving parts is extremely challenging,” Benoit Anne, London-based head of emerging-markets strategy at Societe
Generale SA, said in a phone interview from New York. Anne said
he woke up at 2 a.m. on Jan. 29 for Turkey’s central bank
decision and was awake again at 4 a.m. to monitor the market
before arriving for work at 7 a.m. for a morning meeting.
“It’s almost around the clock,” he said. “It’s extremely
stressful.”
All but seven of 24 developing-nation currencies fell
yesterday, with Russia’s ruble and Mexico’s peso losing more
than 1 percent against the dollar. The South Africa Reserve Bank
unexpectedly raised the repurchase rate to 5.5 percent from 5
percent, following Turkey’s decision to boost borrowing costs
after a late-night emergency meeting.
Overdue Moves
“If you look at the things that have kicked off over the
last two weeks in terms of currency, they are kind of long
overdue,” said Gary Dugan, who helps oversee about $53 billion
as the Singapore-based chief investment officer for Asia and the
Middle East at Royal Bank of Scotland Group Plc’s wealth
management unit. “All of these things are well known, but it
reached a crescendo that broke the back of the market.”
Speculation that developed market stocks were due for a
retreat has built for months, including forecasts this month
from Blackstone Group LP’s Byron Wien and Nuveen Investment
Inc.’s Bob Doll Jr., who both called for a 10 percent drop. The
SP 500 hasn’t lost 5 percent since June 2013. For the MSCI All-Country index, the broadest gauge of global equities, the last
retreat of 10 percent was in June 2012.
Global stocks had surged since mid-2012, with U.S. equities
capping a fifth year in a bull market, as the Fed implemented
three rounds of quantitative easing and earnings nearly doubled.
Ignoring turmoil in emerging markets, the Fed said yesterday it
will trim its monthly bond buying by an additional $10 billion,
sticking to its plan for a gradual withdrawal from departing
Chairman Ben S. Bernanke’s unprecedented easing policy.
Finding Opportunities
The emerging-markets selloff has done little to dent the
$10 trillion of stock value that was created worldwide in 2013,
when the SP 500 advanced 30 percent and Japan’s Topix Index (TPX)
climbed 51 percent.
“I like days like this,” Carsten Hilck, who oversees
about 5 billion euros ($6.8 billion) as senior fund manager at
Union Investment Privatfonds GmbH in Frankfurt, said in an
interview. “Risk and reward goes together in markets like this.
Turbulence makes prices move so I can react.”
This year’s drop in global equities is half as large as the
worst retreat of 2013, when the MSCI gauge fell 8.8 percent from
May 21 through June 24 after Bernanke raised the possibility in
Congress of reducing stimulus. It slid 14 percent between March
and June 2012 as Europe struggled to extinguish its sovereign
debt crisis in Greece and Portugal.
1998 Similarities
Declines will prove temporary, much as they did in 1998,
according to Mark Matthews, the Singapore-based head of Asia
research for Bank Julius Baer Co. Like then, the latest
selloff comes after a five-year advance lifted valuations above
historical averages. The SP 500 traded as high as 17.4 times
annual profit in December, the most expensive level in almost
four years, data compiled by Bloomberg show. In 1998, stocks
rebounded from a 19 percent drop that came as currency turmoil
in Asia and Russia spread to developed markets.
The most vulnerable emerging markets “have already reached
a bottom in terms of their ‘badness,’” Matthews said. “Even if
they do continue to see economic slowdown, I cannot believe it
would be enough to derail the strong U.S. recovery.”
The global economy will grow 3.7 percent this year, up from
an October estimate of 3.6 percent, the International Monetary
Fund said in revisions to its World Economic Outlook released
Jan. 21, citing accelerating expansions in the U.S. and U.K.
Economies of Japan, Europe and the U.S. are forecast to expand
together for the first time since 2010, according to data
compiled by Bloomberg.
Market Breadth
A total of 460 stocks in the SP 500 ended higher in 2013,
the most since at least 1990, according to data compiled by
Bloomberg. While breadth of that nature has been a bullish
stock-market indicator in the past, the turmoil in emerging
markets this year is leading investors away from equities,
according to Jawaid Afsar, a trader at Securequity Ltd. in
Sheffield, England.
“Last year, you could’ve picked any stock at any time and
you didn’t need protection because the markets kept going higher
and higher,” Afsar said by telephone. “Suddenly, emerging
markets have tumbled across the board, currencies are getting
hit hard, so people are running for cover. It’s come out of the
blue.”
Treasury Haven
Stress in emerging markets has made a winner out of two of
last year’s least-loved assets. Treasuries rose yesterday,
pushing 10-year note yields down to the lowest level in two
months. Gold, which posted its worst annual return since 1981
last year, has climbed more than 5 percent in January.
Shifts among asset classes and the global declines in 2014
have led to a surge in volatility. The Chicago Board Options
Exchange’s Volatility Index, known as the VIX, reached 18.14
this month, the highest level since October, and average daily
moves in the SP 500 rose to 0.55 percent, compared with 0.44
percent in December, data compiled by Bloomberg show.
“My phone hasn’t stopped ringing in the past few days, and
I met with about half of my clients, as some of them have direct
exposure to emerging-market currencies,” Lorne Baring, who
manages about $500 million as managing director of B Capital in
Geneva, said in a telephone interview, adding the firm reduced
emerging-market exposure prior to the selloff. “They want to
know my views on whether the situation is going to get worse,
and I tell them yes, it will.”
To contact the reporters on this story:
Whitney Kisling in New York at
wkisling@bloomberg.net;
Eleni Himaras in Hong Kong at
ehimaras@bloomberg.net;
Weiyi Lim in Singapore at
wlim26@bloomberg.net
To contact the editor responsible for this story:
Lynn Thomasson at
lthomasson@bloomberg.net