Singapore: August is turning out to be chaos for emerging markets.
Bonds and stocks from developing economies are poised for their worst monthly losses since last September after Nigeria’s central bank revealed it has less reserves than estimated, an outsider won primaries in Argentina and a presidential candidate was assassinated in Ecuador. The upheaval, alongside a jump in US Treasury yields and dismal economic data in China – with the government ramping up efforts to stabilize markets last week – is forcing investors to re-examine the case for riskier assets. This time, they must acknowledge that high returns often come with high jinks.
“Welcome to emerging markets. The risks have always been more political than economic,” said Carlos Legaspy, the chief executive officer of brokerage firm Insight Securities. “It’s always a moving target.”
In the span of just a few weeks, the case for investing in developing assets has had a shakedown. Dollar-denominated government bonds have pared their 2023 rise to about 2.5% from a peak of 5.8%, according to data compiled by Bloomberg. An MSCI Inc. gauge of currencies, meanwhile, has wiped out much of the year’s early rally.
Stocks, too, are poised for the worst August since 2015 as global capital markets recalibrate.
The declines are a reminder of the frailty of emerging-markets rallies, which can crumble in an instant with volatility raising the assets’ risk profile, potentially triggering even more selling. The Cboe Emerging Markets ETF Volatility Index is rising in August for a second-straight month. For Mila Skulkina, a portfolio manager at Lord Abbett & Co., one way to mitigate risks is to focus on investing in countries, especially in Latin America and the Middle East, that are embracing market-friendly change.
“The emerging-markets investment category of today is not the same as it was 20 years ago,” she said. “Many systemically important emerging-market countries have successfully implemented market-friendly reforms and policymakers had the resolve to stick to those reforms in difficult times.”
Hardly anywhere, however, has the outlook been as opaque as in Argentina and Ecuador in recent weeks. The two serial-defaulting countries are both in the midst of presidential elections, with investors left guessing.
In Argentina, overseas bonds have tumbled since Javier Milei unexpectedly led in a closely watched presidential primary vote on Aug. 13, with vows to abolish the central bank and dollarize the economy.
The apparent rejection of a market-friendly government in the country is enough for Insight Securities’ Legaspy to recommends moving capital out of Argentina.
