China's policy shifts are a bigger driver of the selloff in emerging markets than the Federal Reserve's decision to dial back stimulus, according to Goldman Sachs Asset Management.
Volatility will rise toward its long-term average, and that means an increase in risk premiums, said Philip Moffitt, head of fixed income in Sydney for Asia and the Pacific at Goldman Sachs Asset Management, which had $991 billion of assets under supervision worldwide as of September. The risks for different emerging economies will become more idiosyncratic and Mexico presents a buying opportunity following the rout, he said.
Markets from Turkey to South Africa and Argentina were roiled during the past month as investors sold off emerging-economy currencies, stocks, and bonds, prompting emergency measures from governments and central banks. The bout of risk aversion follows the Fed's decision to scale back asset purchases and China's pledge to rein in leverage and give market forces a more decisive role in allocating resources.
“The selloff in emerging markets has much more to do with China than with Fed tapering,” Moffitt said yesterday in an interview in Sydney. “China's such a big source of global demand, in particular for other emerging markets, uncertainty's going to stay high and risk premiums should be expanding.”
The worst isn't over for emerging markets, Mark Mobius, who oversees more than $50 billion in developing nations as an executive chairman at Templeton Emerging Markets Group, said in an interview. Prices can decline further or take time to stabilize, he said.
China's policy makers have attempted to rein in the unprecedented credit boom they unleashed in 2008-2009 amid the global financial crisis. Money market rates in China have surged, the cost of insuring against credit default by banks has increased, and payment difficulties are emerging in the country's $6 trillion shadow-banking industry.
“They're looking to create a market that prices credit risk, rather than having prices imposed,” Moffitt said. “In the absence of a strong mechanism for pricing credit risk, there's likely to be a lot of uncertainty and volatility.”
The world's second-largest economy is predicted to expand by 7.4 percent this year, the slowest pace since 1990, according to the median estimate in a Bloomberg News survey.
Diverging Outlooks
The slowdown in China comes as the U.S. economy is showing signs of a pickup, allowing the Fed to trim its monthly bond purchases to $65 billion from $85 billion. U.S. growth is expected to accelerate to 2.8 percent in 2014 from 1.9 percent last year, according to a another Bloomberg poll.
Moffitt said investing in Mexico would be his top trade at the moment because the country's fundamental outlook is strong even though it has been affected by the global selloff.
“There's been outflow from emerging-market assets and when you get that kind of flow people sell what they can sell, often high-quality assets,” he said. “It will benefit from the strong U.S. growth we're expecting and there's the prospect for rate cuts, so Mexico stands out to us on both value and fundamentals.”
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