Emerging Markets slowdown and investor complacency

Unilever, the big consumer products company, has just released its first half figures: surprisingly growth in emerging markets (EM), where it makes most (57%) of its sales, came in below expectations. Growth has been around 6.6% which is below the inflation rate in most of these countries, i.e. there has been no “real” growth in sales. Consumer goods companies ales usually are good proxies of gdp growth with the added benefit that they are more reliable and more readily available than gdp estimates proper.

After a bad start into 2014, emerging markets assets (currencies, bonds and shares) have made a strong comeback recently. Whereas at the beginning of the year there was a lot of talk about the end of the BRICS story and Turkey facing huge political problems, there is none of it right now. As famous Hungarian-born speculator Andre Kostolany always used to say: “it is not the news that make the prices, but the prices make the news!”

As a long time investor in Emerging markets who started to invest in EM at the beginning of the millennium  I was caught by surprise by the recent move. After all, most markets did not touch what I would consider fair value (on the currency and interest rate side) although market technicals looked terrible. In the past, even during the booming 2003-2008 period, there was regular overshooting on the downside whenever a correction was due. I eagerly was awaiting to put my cash hoard into profitable use by mid 2014 – to no avail.

Ok, surprising market moves are a regular feature, I am used to that. But the following chart, taken from the FT, shocked me:


The sovereign debt issuance of emerging market governments (China excluded, mind you) has reached record proportions. Regardless of whether you agree with me or not on general market prospects, we certainly can agree that the EM-outlook has already looked better. Lending record amounts under these circumstances can only be judged as mindless yield-hunting…


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