Emerging Markets: Sigh, the Fed is being pretty tight with it’s currency. Come on coach, let emerging markets spin!
Ben Bernanke: Policy accommodations are warranted. You get cash! You get cash! You get cash! Everybody gets cash!
Emerging Markets: Invest in [Insert Emerging Market country]. Check out our growing middle class, enormous investment returns, and sandy beaches.
Ben Bernanke: My arm is getting a little tired from throwing these hundreds, so I’m thinking I’m going to wrap this thing up a little early.
Chorus aka Traders: Sell!
Emerging Markets: Wait! Hold up! Oh snaps, what are we going to do? (Christine LaGarde’s name pops up on the cellphone)
Jim O’Neill: Why are you crying? Quit being punks. Step up your financial market game. Give me one good reason why US currency continues to be more important to your economy than your currency is to developed markets. (Silence) That’s what I thought. Quit crying.
Richard Koo: Welp, that’s what you get for not making some hard decisions and preventing US currency from impacting your economy so heavily.
Mark Mobius aka Lex Luthor: Hey. Everybody calm down. Looking historically, emerging markets are killing the game with the returns they are generating for investors. Their foreign exchange reserves are larger than those of developed markets. And, their debt-to-GDP ratios are typically lower. That’s attractive, and if emerging markets keep it up, will remain so for a while. A bump in the road here and there will only make them stronger. Furthermore, there’s still a ton of liquidity out there. Ben has been throwing dollars Lil Wayne style. On another note, do you like my creme suits?
Mark Mobius is spot on. Involving oneself in emerging markets is a long-term play. Because of that, traders looking for quick hits are going to find themselves in panic-mode more often than they would like – especially if they have not done thorough research. Commit to the long-term, do the homework, don’t panic, and investors won’t regret the experience.
Emerging market policy makers have a tough line to walk. Consumers in emerging markets are working hard to be able to afford Nando’s (delicious stuff). Policy makers in efforts to create a virtuous cycle of FDI are trying to put consumers in a position to meet their aspirational tastes. At the same time, emerging markets must instill the discipline necessary to position their citizens for Singapore-like sustainable growth. That takes hard teamwork from all stakeholders. Done well, I anticipate having fewer restless nights pondering why Africa is so far back.
I agree with Jim O’Neill’s challenge to emerging markets to develop their financial markets and reduce their dependence on US currency. A few years ago, Nigeria’s Central Bank shifted a portions of its foreign exchange reserve to include Chinese Renminbi. Will we see other Central Banks doing more of this? The newly minted East African Exchange and the continued work of the Asset Management Corporation of Nigeria are examples of African countries taking steps to strengthen their financial markets.
The Work Continues
The emerging market sell-off that has been going on for the past few months has been frustrating to watch. It must reinforce the urgency with which emerging market policy makers create environments for wealth creation locally and globally. The investors who conduct country-specific research rather than look for key words will continue to do well. At the end of the day, folks are going to make money.