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Coutts Says Emerging-Market Crisis ’Talk’ as Wealthy Buy

Luohu District of Shenzhen
A man walks on an overpass in the Luohu district of Shenzhen. Emerging-market assets are tumbling as China’s economy slows, weak currencies from India to Turkey spur central banks to raise interest rates and the U.S. Federal Reserve pushes ahead with plans to reduce monetary stimulus. Photographer: Brent Lewin/Bloomberg

Coutts & Co., the wealth management unit of Royal Bank of Scotland Group Plc, said it doesn’t see a crisis in emerging markets and the firm’s rich clients are taking advantage of this year’s declines to boost holdings.

“If you look at the balance of trade that our clients are doing, they’re buying,” Gary Dugan, the chief investment officer in Asia and the Middle East for Coutts, which counts Queen Elizabeth II among its clients, said in a interview yesterday in Dubai. “There’s been an appetite for Asia and for Russia after the sell-off. There’s no crisis, it’s just talk.”

Emerging-market assets have tumbled this year as China’s economy slowed, weak currencies from India to Turkey spurred central banks to raise interest rates and the U.S. Federal Reserve pushed ahead with plans to reduce monetary stimulus. Investors removed more than $12 billion from developing-nation equity funds in the two weeks to Feb. 5, the biggest outflow since January 2008, according to Morgan Stanley, citing data from EPFR Global.

The rout, which sent valuations on emerging-market stocks to the lowest level in more than five years versus advanced-nation shares, is dividing investors. Jim O’Neill, the former chairman of Goldman Sachs Asset Management who created the BRIC moniker for the largest emerging markets, said the losses are a buying opportunity. Mark Mobius, who oversees more than $50 billion as chairman of Templeton Emerging Markets Group, said last week his firm is holding off from buying as it expects the sell-off to continue.

Stocks Rally

The MSCI Emerging Markets Index dropped to 11 times reported earnings at the end of last week, a 40 percent discount versus the MSCI World Index, the widest gap since October 2008, data compiled by Bloomberg show.

The emerging-market measure has rallied for three straight days, climbing 2.5 percent from a five-month low on Feb. 5. It rose 0.2 percent at 3:42 p.m. in Hong Kong. A Bloomberg index tracking 20 emerging-market currencies advanced 0.7 percent last week and was little changed today.

“People have tried to say it’s a repeat of 1994 or 1998,” Dugan said, referring to previous emerging-market crises. “No, it’s not. This is not an emerging world that’s got huge debt with the rest of the world and in fact some of the currency adjustments have already improved the situation.”

Deficit Narrows

India’s current-account deficit will narrow to below $50 billion in the year ending March 31 from a record $88 billion in the previous 12 months, Finance Minister Palaniappan Chidambaram said Jan. 30. Indonesia’s shortfall was probably below 2 percent of gross domestic product last quarter, from 3.8 percent in the previous period, central bank Governor Agus Martowardojo said last week.

“If you look back to the problems that India and Indonesia had in the middle of last year, both countries worked very hard for six months to ensure either reserves were rebuilt or they became more competitive in international markets,” Dugan said.

Among the BRIC countries of Brazil, Russia, India and China, Dugan said the latter two are the most attractive. He also favors Taiwan, South Korea and Indonesia, while avoiding Latin America, South Africa and Turkey.

Foreigners bought the most South African bonds since September on Feb. 4 as Reserve Bank Governor Gill Marcus said higher borrowing costs are not “automatic” after the bank unexpectedly lifted its policy rate for the first time in five years on Jan. 29.

Turkey’s central bank increased the one-week repo rate to 10 percent from 4.5 percent at an emergency meeting in January.

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