Financial markets had to digest a lot of negative news during the last few days as Argentina has devalued the Peso and partly relaxed foreign exchange restrictions, with Venezuela announcing its own kind of devaluation, and the Turkish Lira and the South African Rand getting hammered on the markets. The Turkish stock market, for example, is down nearly a heavy 50% in USD-terms since May of last year.
On the back of these negative developments in Emerging Markets, investors fear that this week’s Fed meeting might lead to too much tapering, against the backdrop of less positive macro data and a non convincing earnings’ season so far.
The problems in the Chinese economy with the fears of a big credit bubble bursting, finally made global equity markets sell off heavily. The obvious question thus is: “does this selloff have legs and work itself out into a major correction?”
We need to answer in two respects at this very moment. Let’s start with emerging markets. Emerging markets remain delicate. China credit issues, wide-spread current account issues as well as FED tapering continue to take a lot of speculative capital out of these markets as the below 10-year trend in Turkish Lira spot is impressively exhibiting:
These sorts of Emerging Markets issues are not new. The China credit issue is delicate, but not in a dimension which cannot be managed by the powerful and rich Chinese government. Given recent events in Emerging Markets and recent below-expectation economic data, the FED will most probably consider very carefully any increase in tapering (recent USD weakening seems to start to price this in). Hence, one should not panic here. Do not consider any investments in Emerging Markets yet, but wait for valuations to get ridiculously cheap on a broad scale in at least some of these markets.
For developed markets, there is reason to stay bullish Japan and Europe. Apart from temporary selloffs (which are nothing but normal, particularly in Japan) due to temporary USD weakness / JPY strength, we see nothing brewing which should significantly deteriorate things over there. In Europe, Germany has moved to be a strong supporter of the bailout nations over the past 6-12 months (if bailouts fail, German taxpayers pay more...). The political will to keep this construct (EU) together remains very strong.