Wednesday, February 26, 2014

Summary: Emerging Market Volatility - Contained or Contagion?

By Cara Caponi

Panelists debated recent turbulence in emerging markets, as well as the impact of political crises on these economies.

Speakers:

Ralph Davidson, Chief Equity Strategist, Itaú Private Bank International
Luis Oganes, Managing Director, Head of EM Local Markets Strategy and Latin America Research, JP Morgan
Lúcio Vinhas de Souza, Sovereign Chief Economist, Moody’s Investor Service
Vivianne Rodrigues, Capital Markets Correspondent, Financial Times (Moderator)

Summary

On February 18, AS/COA hosted a panel discussion on emerging markets as panelists debated whether or not recent economic trends point to a greater crisis. They discussed the implications of a possible decline in emerging markets, as well as the impact of political crises on emerging market economies.

Origins of Volatility in Emerging Markets The Financial Times’ Vivianne Rodrigues began the conversation by asking the panelists about the fundamentals of emerging markets and price volatility. JPMorgan’s Luis Oganes responded that “emerging markets are caught between two forces: recovery in the developed world and the drag coming from China.” While emerging market growth has not fully recovered, Oganes noted the massive outpouring of funds from emerging markets thus far in 2014. Itaú’s Ralph Davidson pointed to the impact of economic policies in Europe, Japan, and the United States, saying that as developed markets expand exports and decrease imports, less capital makes its way into emerging markets. Moody’s Investor Service’s Lúcio Vinhas de Souza commented that the current volatile situation in emerging markets is “in a way completely foreseeable. This is a normalization of the process of monetary policies.”   Vinhas de Souza explained that countries are better equipped to respond to quickly changing markets than they were even 10 or 20 years ago. Central banks have higher hard currency reserves that serve as a cushion when investors are nervous in unpredictable markets. In regards to encouraging investors to return to emerging markets, Oganes said that two conditions must be met to convince them: stabile growth, and “the rebalancing of the relative prices between risk in emerging markets and risk in the developed world.” Doing Business in Emerging Markets Panelists discussed the issue of corporations operating and growing in emerging markets. Davidson said that “risk hides in funny places,” and for that reason most growth by developed market corporations has occurred in the developed world. Vinhas de Souza disagreed, saying that developing countries are still growing much faster than developed economies despite the recent fluctuations. He pointed to flexible exchange rates and hard currency reserves as underlying strengths of emerging markets to buffer the effects of rapidly changing markets. Responding to Davidson, Vinhas de Souza was skeptical of the notion that “a real crisis” in emerging markets. Oganes said that “capital markets have not closed on emerging markets,” adding that the appetite for emerging markets still exists because they serve as an attractive alternative to U.S. and European markets. Emerging Markets and Political Instability Given the instability in Thailand, Ukraine, and Venezuela, Rodrigues asked how the level of discontent expressed by a country’s people can affect that country’s economic outlook. While Vinhas de Souza argued that the unrest in these developing countries is unrelated, Oganes stressed the importance of the perception that “emerging markets are somehow imploding” because of security concerns, political instability, or protests. He continued: “People make extrapolations that economically make no sense, but economics is a social science—a science of economic behavior of people—and it just doesn’t help in terms of confidence to have these episodes so widespread even though there is really no connection or commonality.” With general elections this year in Brazil and India, the markets will surely react to the new political realities in these markets, panelists agreed.

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Summary: Emerging Market Volatility - Contained or Contagion?

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