- Emerging market corporates are an area of concern, Jain says
- For Templeton, recent declines seen as a buying opportunity
The rebound in emerging markets over the past five days has failed to dispel concern there is more bad news ahead.
Anshu Jain, the former co-chief executive officer at Deutsche Bank AG, said some developing nations hurt by plunging commodity prices and an outflow of funds remain a worry. That’s after Fortress Investment Group LLC told investors emerging markets are at the start of a bear market that could rival the Asian financial crisis of 1997.
“In certain parts of ex-Japan, ex-China, ex-India Asia we could have some bad news,” Jain said in an interview at Bloomberg Markets Most Influential Summit 2015 in London on Tuesday. He pointed to Brazil, South Africa, Russia and Turkey as other emerging markets that harbor risks.
The sell-off in emerging markets, which began in June, has led to a credit contraction that will last until at least March 2017, according to a letter to investors in Fortress Convex Asia Fund Ltd., signed by Singapore-based Chief Investment Officer David Dredge, and fund co-managers Nicholas Heaney and Andy Wong. Fortress said it used past economic cycles as a guide in evaluating the current market.
“Our view is that we are in the beginning stages of the next contractionary cycle, and this cycle, similar to 1997-1998, is commencing on the emerging market side of the global imbalance,” Fortress wrote in the investor letter, dated Sept. 30.
After falling for most of this year, emerging-market assets have gotten a respite recently as weaker-than-expected U.S. economic data fueled speculation that the Federal Reserve may keep interest rates low for longer.
The MSCI Emerging Markets Index of stocks has increased 6.7 percent since Sept. 29, after tumbling 19 percent last quarter, the biggest loss since 2011. A Bloomberg gauge of developing-country currencies rose for a third day, rebounding from a record low. The extra yield investors demand to own emerging-market debt over U.S. Treasuries narrowed to 4.16 percentage points, from a four-year high of 4.38 percentage points on Sept. 29, according to JPMorgan Chase & Co.
The drivers for the emerging-market turmoil are more than fleeting. A slowing Chinese economy and slumping commodity prices helped push Brazil and Russia into recessions, while the prospect for an increase in U.S. interest rates is draining capital from countries such as Turkey and South Africa.
The International Monetary Fund lowered its growth forecast for developing nations Tuesday and urged policy makers to get ready for the U.S. to tighten monetary policy.
Emerging market economies will expand 4 percent this year, the slowest since 2009, before growing 4.5 percent in 2016, the Washington-based lender said. In July, it expected a growth rate of 4.2 percent for this year and 4.7 percent for 2016.
Brazil’s outlook was cut the most among the major economies. The IMF expects its economy to shrink 3 percent this year and 1 percent in 2016. Russia will contract by a larger-than-expected 3.8 percent this year, before shrinking 0.6 percent in 2016.
Not all managers are bearish.
With some of the emerging-market currencies falling to historical lows, Michael Hasenstab, who oversees 30 funds with $143 billion in assets at Franklin Templeton, said it creates investment opportunities not seen in decades. The San Mateo, California-based money manager is buying the Mexican peso, Malaysian ringgit and Indonesian rupiah, even as he steers clear of assets in Turkey, South Africa and Russia.
One source of concern is that companies in developing nations embarked on a borrowing binge in international markets in recent years, and some of them may have difficulty paying back the debt as their currencies depreciate, said Jain, who stepped down as co-CEO of Deutsche Bank at the end of June.
Outstanding dollar-denominated debt sold by emerging-market companies soared to $1.3 trillion, from $338 billion at the end of 2008, according to data compiled by Bank of America Corp. A declining currency makes it more expensive for companies to pay back their dollar debt.
Ray Bakhramov of Forum Asset Management, whose hedge fund has surged 107 percent this year by betting against emerging market assets, sees volatility continuing for years. He pointed to historical analogies between the current environment and the Asian financial crisis that started in 1997. Ray Dalio’s Bridgewater Associates has said the impact of emerging-market losses is likely to be more widespread than in the crises of the 1980s and 1990s because investors have more money invested in developing markets.
Pacific Investment Management Co. has cut its exposure to emerging markets this year, even though it sees “good medium-term opportunities,” said Andrew Balls, the chief investment officer for global fixed income at the company.
“The near term looks quite difficult,” said Balls, adding that Pimco is betting Asian currencies will fall.