Angst Over Argentina Upends Alpine Complacency in Davos
Over a three-hour lunch in Davos yesterday, Carlyle Group LP (CG) co-founder David Rubenstein told a group of investors and bankers his biggest worry: nobody appeared to be worried about anything at all.
Less than 24 hours later, the devaluation of the Argentine peso accelerated the worst selloff in emerging market stocks in five years, unnerving delegates at the World Economic Forum in Switzerland. As they shuttled from meetings to meals, losses were piling up by the minute as developing nation currencies slid with equities.
“I don’t want to look,” Daniel Loeb, billionaire founder of hedge fund Third Point LLC, said of the financial markets as he walked between meetings at the Congress center in Davos.
After recent gatherings were dominated by crises from Lehman Brothers Holdings Inc. to Greece, this year’s had begun to reflect a mood of optimism as economies and stock markets recovered. That enthusiasm waned today as the rout in emerging markets exacerbated concern that the engines of global growth since the crisis have now stalled.
Attendees at the Davos lunch included Larry Fink, chief executive officer of Blackrock Inc. (BLK), the world’s largest money manager, Blackstone Group LP (BX)’s Steve Schwarzman and UBS AG (UBSN) Chairman Axel Weber. They were briefed by Treasury Secretary Jacob J. Lew and Bank of Japan Governor Haruhiko Kuroda.
“Over the last couple of years people have gotten a lot less worried, but there are always things like black swans that come around,” Rubenstein said in an interview today. “I just wanted to make sure everybody remembers that and that we are likely to have some bumps along the road.”
Emerging market stocks have suffered their worst start to a year since 2009 as signs of weakness in China’s economy add to concern about the impact of cuts to the U.S. Federal Reserve’s stimulus program. The MSCI Emerging Markets Index fell 1.5 percent today, extending this year’s slump to 5.3 percent.
Argentine policy makers devalued the peso by reducing support in the foreign-exchange market, allowing the currency to drop the most in 12 years to an unprecedented low. Turkey sold dollars to prop up the lira and South Africa’s rand declined to a five-year low.
Goldman Sachs Group Inc. (GS) CEO Lloyd Blankfein told Bloomberg Television’s Erik Schatzker and Stephanie Ruhle today he would “wait a while before saying there is a complete reversal” in markets, noting they were due a consolidation having “gone up very far in a single direction.”
“Davos Man is probably right in thinking 2014 will be a nice year, with more growth than last year,” Jean-Claude Trichet, former president of the European Central Bank, said in an interview. “But of course risks are still there.”
Forcing the reappraisal is the Fed’s tapering of monetary stimulus, which had previously covered all ills by prompting investors to chase returns in emerging markets.
With the U.S. central bank now cutting its monthly asset purchases from $85 billion, money managers are refocusing on the fundamentals of economies, punishing those with weak policies or imbalances such as large current account or budget deficits.
The shift was underscored this week by the International Monetary Fund, which released new forecasts showing emerging markets will outpace advanced nations by the smallest margin this year since 2001.
“Investors have been overly complacent in emerging markets,” Davide Serra, founder of London-based Algebris Investments LLP, said in Davos. “In 12 to 18 months, as real rates rise in the U.S. we’ll see which emerging markets were swimming naked.”
Other emerging economies are displaying faultlines, with investors mainly focused on the so-called fragile five of Brazil, India, Indonesia, South Africa and Turkey.
China is also struggling to contain $4.8 trillion in shadow-banking debt, while Brazil is trying to rein in inflation fuelled up by a falling currency and higher public spending. A corruption investigation is embroiling Turkish Prime Minister Recep Tayyip Erdogan’s cabinet and deadly protests in Ukraine and Thailand are eroding confidence in their stability.
“We’re in a volatile era and anyone who doesn’t think that is overly complacent,” said Tim Adams, president of the Institute of International Finance, which represents more than 400 financial firms, and the U.S. Treasury’s former undersecretary for international affairs. “The re-pricing of risk will continue and there will be peaks of convulsions and complacency.”