Adviser Who Forecast Emerging Stocks Slump Sees More Pain Ahead

  • Developing-nation stock benchmark fell through support level
  • Selloff is ``something bigger,'' Julian Brigden says

Emerging-market stocks are heading for a further 42 percent slump after breaking a long-term trend that have sustained equities since the turn of the century, according to a hedge-fund consultant who correctly predicted last year’s selloff.

The MSCI Emerging Markets Index tumbled to a seven-year low on Wednesday, dipping through the 715 level, which is the extension of a weekly trend line that has supported stocks since 2002. The breakthrough opens up for further declines toward 570 on the benchmark gauge, and eventually 400, which is on another trend line that has provided support since 1988, according to Julian Brigden, managing partner at Macro Intelligence 2 Partners.

Global equities are on the cusp of a bear market as China’s slowdown, higher U.S. interest rates and falling commodity prices darken the outlook for the economic growth. Emerging markets are among the worst hit -- the stocks gauge posted the worst ever start to a year, while currencies slumped to a record and the risk premium on developing-nation debt climbed to the highest in more than six years.

‘Something Bigger’

“This is not just a 10 percent correction, and then you buy,” said Brigden by phone from Vail, Colorado. “This, to me, is something bigger.”

While a short-term bounce is likely, a selloff in emerging-market dollar debt, which was among the best-performing assets in the world last year, will spill over to the equity market and lead to more losses, said Brigden, the 50-year-old Wall Street veteran who has worked at Salomon Brothers, Lehman Brothers and UBS AG over the past three decades.

While developing-nation stocks fell 17 percent last year, government and corporate bonds held up because investors put on hedges to protect themselves, rather than dumping the assets, said Brigden. As hedging becomes more expensive, investors have no choice but to liquidate the bonds, creating another wave of the selloff across developing nations, he said.

“We haven’t had the capitulation yet,” said Brigden. “That’s the risk. That’s the next stage of the crisis.”

Brigden made several bearish calls on emerging markets last year that proved prescient. He advised betting on declines in developing-nation stocks within two days of their 2015 high in April. He also warned of the risk of a yuan devaluation in July, one month before China surprised global investors by letting its currency decline.