Saturday, June 1, 2013

Global portfolio rebalancing hits emerging markets

The underperformance across emerging markets stocks is becoming more severe. In spite of Friday's beating to the S&P500, emerging markets indices are faring worse. Brazil's Bovespa for example is down 14.5% year-to-date (vs. S&P500 up 15% YTD). This level of dispersion is unusual and indicates fundamental concerns about growth in emerging markets.

Source: Ycharts (click to enlarge)

Part of the issue with these markets is the ongoing weakness in commodities. Commodity producing nations such as Brazil, Mexico, and South Africa are increasingly feeling the pressure. Just the last few days for saw a steady selloff across commodity markets (below).

DJ UBS Commodities Index (source: Dow Jones)

As an example, take a look at the decline in sugar prices (see chart on Twitter), which will hurt sugar producers in Brazil. And the recent weakness in gold price is hurting South African mining firms (of course South Africa is facing major economic problems in general - see this article). Add to that political stability risks (such as protests spreading in Turkey), and it makes for a difficult investment climate. And the weakness is not limited to emerging markets stocks. Many bond markets are being pressured as well. Just take a look at the price action on iShares Emerging Markets Bond ETF (EMB):

And here is the Mexican government 10-year bond yield in recent months. Government bonds in Brazil, Turkey, Russia, and others are also seeing spikes in yields.


Part of this bond weakness is of course driven by raising yields in the US and fears of Fed's eventual exit. But it only goes to demonstrate how dependent global markets have become on central bank stimulus (see post).

Some portfolio managers have had enough and are abandoning emerging markets altogether - even nations that are not commodity exporters. As an example here is the Indian rupee's recent performance.

Indian Rupees per one dollar (higher number indicates weaker rupee)

Emerging market currencies are feeling the pressure across the board as investors pull their capital. The Turkish lira hit the lowest level in 17 months and the South African rand is down 13% year to date. The rebalancing of capital away from emerging markets is in full swing.
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