August was a month of stark contrasts in market performance. It wasn’t just “America First” in politics as the US economy and its capital markets exhibited their dominance. The longest equity bull run, now over a decade and going, keeps reaching new highs and milestones – Apple became the first company with a one trillion US dollar market cap.
The sturdiness of US-dollar assets is inverse to the angst observed in emerging markets. When looking at market performance, those countries engaging in trade or diplomatic spats with the US (e.g. China, Turkey, Russia, Iran, and Venezuela) are coming off decidedly second best.
Turkey dominated the headlines in August. The pressures of eroding sentiment and an unorthodox monetary policy further exacerbated by tit-for-tat diplomatic sanctions with the US proved to be a breaking a point for the markets, sending the lira into freefall. The currency subsequently found a tenuous level of stability after central bank announcements pointed to liquidity injections and to an announcement of a partial Qatari “bailout”.
Argentina, suffering from a myriad of economic problems, managed to make things worse by bumbling its communication around an IMF package and giving the impression that the disbursement of IMF funds needed speeding up. This communication faux pas was especially surprising as the finance minister Luis Caputo is himself an ex trader and supposed to know how to communicate to the market. We’re puzzled why he let President Mauricio Macri talk before having the full support of the IMF and without giving many details. This resulted in investors running for the exits as they interpreted the story as worse than it probably was. The central bank then stepped in and hiked rates by 15% to try and quell the movement.
Ultimately, Argentina is a quasi-frontier market in terms of the depth and breadth of its capital markets. Therefore, the “exit” is always more painful than the “entry” as there is low liquidity, and currently currency movements in particular are exaggerated.
The daily losses in the Argentine peso (-16.8% on August 30) and Turkish lira (-13.8% on august 10) land them third and fifth in the league table of top one-day falls of all major currencies over the last fifteen years (source: Goldman Sachs). Quite an achievement to take two of the top spots in the same month! The events in Turkey and Argentina show how sensitive the market is at the moment to any hint of negative news from emerging markets.
In Asia, the potential escalation of a trade war between China and the US is the story that won’t go away. The rhetoric escalated yet again with the US considering further tariffs on 200 billion US dollars in Chinese imports (with reciprocal measures on 50 billion US dollars each side already taken). As a consequence, the Chinese currency remained under pressure. However, it stabilised on the hopes of a breakthrough in the negotiation stalemate and as the People’s Bank of China employed its “counter cyclical buffer” in renminbi fixing calculations, to increase wiggle room. The risk of increased tariffs on 200 billion US dollars of Chinese imports into the US remains pending.
Emerging market investors have been shaken by the events of the previous month and currently it’s not the place to be for those who prefer smooth sailing. In the near term, Turkey and Argentina are likely to remain in focus as they keep fighting off market pressure. Otherwise, there are likely to be further geopolitical developments, including those involving the US (China, Turkey, Iran, Korea, Russia etc.). In the midst of all this jitteriness there is hope, it appears that the markets have already priced in a lot of bad news and yields are now looking even more enticing than they did just a few months ago. For example, the yield of the emerging market sovereign benchmark keeps trading close to post-2009 highs, at around 7%. That’s something that many investors are forgetting, just like they are forgetting that periods of heavy volatility are part of the emerging market landscape. Experienced investors have weathered and prospered from these types of storms before and know that this too, shall pass.
Lud D’hooge, head of Emerging Markets Bonds, Vontobel Asset Management