Gloom descends on emerging markets
Concerns about an economic slowdown now weigh on capital markets.
Stock markets tanking. IPO volumes falling off a cliff. Bond spreads widening. Volatile commodity prices. Capital outflows at their highest level for more than a decade. Macroeconomic and political uncertainty back on the agenda.
There’s little to suggest that the immediate future looks rosy for emerging markets. Wherever one looks – Russia, China, Argentina, even in parts of the Middle East – there is a growing sense of unease. Just consider some recent headline numbers. Outflows from emerging market equities and bonds hit $29.5 billion in the three months since June, according to data provider EPFR Global. Stock markets across the developing world have fallen sharply this year, with China, Russia, Ukraine and Pakistan leading the way. In mid-September, the MSCI Emerging Markets Index fell to an 18-month low.
In the primary capital markets, deal flow is sporadic at best and in some cases non-existent. In Brazil, for example, there have been four IPOs this year, compared with more than 60 in 2007. Overall in the emerging markets, debut deals worth more than $30 billion have been cancelled this year, nearly eight times as much as this time last year.
Investors are voting with their feet in the bond markets, too. Earlier this month, for example, Indonesia failed to sell bonds in an auction as the sovereign was unwilling to pay a higher coupon to meet investors’ demands. At the same time and on the other side of the world, Brazil’s largest telephone company, Telemar, pulled a planned $1.5 billion transaction, blaming poor market conditions.
Even basic transaction services are beginning to struggle. Mexico’s central bank has just announced that remittances from expatriate Mexicans have fallen for the first time in the past decade. Remittances account for the second-biggest legal source of income in Mexico, after oil.
What’s driving the negative outlook on emerging markets is not so much the credit crunch – yes, it is making fundraising for sovereigns and corporates much tougher but generally the developing world has held up remarkably well to what is a banking and capital markets crisis.
Instead, renewed fears of a global economic slowdown, falling energy prices and concerns specific to the countries are making investors more risk averse. In Russia, growing state interference in business interests and the war with Georgia are most to blame for the stock market’s woes – it is down 45% in the past four months – and capital flight.
In China, the biggest threat to investor sentiment is the economy, which is showing signs of weakness, and in particular a potential real estate bubble. In South Africa, infrastructure shortcomings and political uncertainty are derailing its financial markets.
The long-term prospects for these nations are still bright. Western financial institutions quite rightly continue to invest in them. But there is a reason why they are still termed emerging.