Emerging Markets See Equity Markets, Currencies Decline
Jitters Rise Over Falling Oil Prices, Fed Policy Outlook
By Nicole Hong And Anjani Trivedi
Updated Dec. 15, 2014 3:34 p.m. ET
Markets across the developing world fell on Monday, on heightened jitters over falling oil prices and U.S. monetary tightening.
Currencies were especially hard hit, with the Russian ruble and Turkish lira plunging to record lows against the dollar. The Brazilian real, South African rand and Indonesian rupiah also sank to fresh multiyear lows.
Analysts say there was no specific catalyst for the selloff, but a number of factors converged to put downward pressure on emerging markets. Global oil prices continued to tumble, exacerbating problems for oil-exporting countries like Russia and Colombia. The Federal Reserve is also scheduled to issue a statement on Wednesday, which could signal that the central bank is closer to raising interest rates. That would deliver a blow to emerging markets that have benefited from years of easy money from the Fed.
As investors scrambled to dump their risky assets, the selloff in emerging markets spread beyond oil exporters into countries like India and Indonesia, which had been relatively resilient in recent weeks.
“There’s just a lot going on in emerging markets, and investors are having some difficulty absorbing that information and figuring out what will happen next,” said Lucas Turton, chief investment officer of Windham Capital Management LLC in Boston, which manages $1.8 billion and cut back on its exposure to emerging-market stocks two months ago.
In afternoon trading in New York, the dollar was up 3.1% against the lira, with the Turkish currency trading at 2.3706 to the greenback. The real was off more than 1% at 2.6884 to the dollar, while the ruble plunged by more than 10% to trade recently at 65.615 to the dollar.
Investors may be pre-emptively selling emerging-market assets ahead of the Fed statement on Wednesday. The statement is likely to “reinforce the divergence between the policy stance of the Fed and other major central banks,” said Mitul Kotecha, head of foreign exchange strategy at Barclays in Singapore.
The Fed is expected to raise interest rates next year as the economy improves, while central banks in Europe and Japan are pursuing strategies to stimulate growth and inflation. This divergence has caused the dollar to soar against currencies around the world in recent months.
“If the Fed indicates that interest rates are going to be raised earlier rather than later…that’s likely to have a further negative impact on emerging markets,” said Clem Miller, a portfolio manager at Wilmington Trust in Baltimore, which oversees $80 billion and has bearish bets on emerging-market stocks and bonds. Mr. Miller said he hasn’t had such a small exposure to emerging markets since the early 2000s.
Thai stocks were one of the biggest victims of the broader selloff on Monday, collapsing over 9% at one point before recovering. The plunge prompted the country’s finance minister, Sommai Phasee, to urge investors to remain calm. “The fall is in line with overseas market movement,” Mr. Sommai told reporters. “Trust me, if it can go down, it can go up.”
Many investors are bracing for turmoil in emerging markets as the dollar strengthens, making it more expensive for these countries to pay back international debt, and as U.S. growth beats much of the rest of the world. For instance, Indonesian companies have issued $11.4 billion of foreign-currency debt so far this year, according to Dealogic, putting them at risk for what analysts call a “currency mismatch.” This means these companies could struggle to pay off their dollar debts as their local currency, the rupiah, weakens in value against the greenback.
Stephen Jen, founding partner of hedge fund SLJ Macro Partners, said emerging-market currencies could “melt down” as investors accelerate their selling.
“Nothing the [emerging market] economies can do will stop these potential outflows, as long as the U.S. economy recovers,” Mr. Jen said.
Currencies were especially hard hit, with the Russian ruble and Turkish lira plunging to record lows against the dollar. The Brazilian real, South African rand and Indonesian rupiah also sank to fresh multiyear lows.
Analysts say there was no specific catalyst for the selloff, but a number of factors converged to put downward pressure on emerging markets. Global oil prices continued to tumble, exacerbating problems for oil-exporting countries like Russia and Colombia. The Federal Reserve is also scheduled to issue a statement on Wednesday, which could signal that the central bank is closer to raising interest rates. That would deliver a blow to emerging markets that have benefited from years of easy money from the Fed.
As investors scrambled to dump their risky assets, the selloff in emerging markets spread beyond oil exporters into countries like India and Indonesia, which had been relatively resilient in recent weeks.
“There’s just a lot going on in emerging markets, and investors are having some difficulty absorbing that information and figuring out what will happen next,” said Lucas Turton, chief investment officer of Windham Capital Management LLC in Boston, which manages $1.8 billion and cut back on its exposure to emerging-market stocks two months ago.
In afternoon trading in New York, the dollar was up 3.1% against the lira, with the Turkish currency trading at 2.3706 to the greenback. The real was off more than 1% at 2.6884 to the dollar, while the ruble plunged by more than 10% to trade recently at 65.615 to the dollar.
Investors may be pre-emptively selling emerging-market assets ahead of the Fed statement on Wednesday. The statement is likely to “reinforce the divergence between the policy stance of the Fed and other major central banks,” said Mitul Kotecha, head of foreign exchange strategy at Barclays in Singapore.
The Fed is expected to raise interest rates next year as the economy improves, while central banks in Europe and Japan are pursuing strategies to stimulate growth and inflation. This divergence has caused the dollar to soar against currencies around the world in recent months.
“If the Fed indicates that interest rates are going to be raised earlier rather than later…that’s likely to have a further negative impact on emerging markets,” said Clem Miller, a portfolio manager at Wilmington Trust in Baltimore, which oversees $80 billion and has bearish bets on emerging-market stocks and bonds. Mr. Miller said he hasn’t had such a small exposure to emerging markets since the early 2000s.
Thai stocks were one of the biggest victims of the broader selloff on Monday, collapsing over 9% at one point before recovering. The plunge prompted the country’s finance minister, Sommai Phasee, to urge investors to remain calm. “The fall is in line with overseas market movement,” Mr. Sommai told reporters. “Trust me, if it can go down, it can go up.”
Many investors are bracing for turmoil in emerging markets as the dollar strengthens, making it more expensive for these countries to pay back international debt, and as U.S. growth beats much of the rest of the world. For instance, Indonesian companies have issued $11.4 billion of foreign-currency debt so far this year, according to Dealogic, putting them at risk for what analysts call a “currency mismatch.” This means these companies could struggle to pay off their dollar debts as their local currency, the rupiah, weakens in value against the greenback.
Stephen Jen, founding partner of hedge fund SLJ Macro Partners, said emerging-market currencies could “melt down” as investors accelerate their selling.
“Nothing the [emerging market] economies can do will stop these potential outflows, as long as the U.S. economy recovers,” Mr. Jen said.
