Emerging markets risk shattering into BIITS.
Investors in these markets are becoming more discerning about where they put their money, shying away from countries such as Brazil, India, Indonesia, Turkey and South Africa. Behind the discrimination is a new-found focus on current- account deficits and structural weaknesses exposed by the likelihood of less stimulus from the Federal Reserve and cooling demand in China, according to economists from HSBC Holdings Plc, JPMorgan Chase & Co. and International Strategy & Investment Group LLC.
That’s a break from the past four years, when emerging markets mainly moved in tandem, seen as either a blanket buy or sell, with little regard to their individual circumstances. Such a mindset was epitomized by the popularity of the BRIC acronym coined for Brazil, Russia, India and China to reflect their potential as future economic powerhouses.
“Investors will be far more choosy among emerging markets than they’ve been in the past,” said Donald Straszheim, head of China research at New York-based ISI. “There will be a natural inclination to seek out the ones that are the best positioned.”
Mexico, the Czech Republic and South Korea are among the still-attractive countries because they are less reliant on foreign finance or took advantage of easy money from Fed stimulus to strengthen their economies.
The Fed’s surprise decision in September to continue its asset purchases provided emerging markets with a respite, as sales of their currencies abated. The reprieve will be only temporary though, according to Michael Shaoul, chairman of New York-based Marketfield Asset Management LLC, which manages about $17 billion.
Some of these nations will see further capital outflows in the next three to six months as investors start to “break it down between good EMs and bad EMs,” he said. His firm is betting against emerging-market equities and bonds, including those of Brazil and India.
“I don’t think the bear market in EMs has bottomed,” he said. “There is a real selling opportunity.”
The theme of differentiation is gaining ground as the International Monetary Fund warns that growth in emerging and developing countries is the weakest since 2009. The Washington- based lender cut its forecast on Oct. 8 to show them expanding 4.5 percent this year, down from a July prediction of 5 percent.