Emerging Markets
EM fundamentals are quite shaky, this might not matter much even on the medium term.
Still it would be unreasonable to just dismiss any level as a good ‘value’ opportunity especially since, while ‘at night all cats are grey’, we need to be reminded that the EM world it is a quite diversified ensemble in terms of fundamentals. A couple of recent papers I have read can be of help in picking up the right apples.
Which EM currencies are the most vulnerable?
Methods and analysis can be very articulated and differ to a great extent. I will present some research notes
from major
houses to give a starting compass in differentiating. For
investment the rest
I
can only wish good luck to any investment choice… For Goldman Sachs, vulnerability
Most exposed: Brazil
Mexico
South Africa Turkey
Ukraine Moderately exposed:
Colombia Chile India Korea
Malaysia Thailand
Chart 6: Which Economies Are Most Exposed To The Risk Of A Sudden Stop? Source: Morgan Stanley
Using these parameters they draw some general conclusions. Turkey has a low ranking across all metrics.
Borderline: Argentina Hungary Indonesia Poland
Least Exposed China Israel Peru
Russia
Morgan Stanley uses a somehow different set of four metrics: • Surges in portfolio flows or ‘hot money’
• ‘Original Sin’ and its new manifestation, i.e. the dramatic increase in foreign holdings of local bonds
• Twin deficits • Excessive domestic
credit,
which can cause not only greater reliance on funding but also capital misallocation Chart 6 shows their findings.
Alessandro Balsotti FX TRADER MAGAZINE July - September 2013 15
goes along these axes: • Economic imbalances o Ratio
of the
FX current
account deficit to GDP o Share of consumption
to GDP (countries with large needs for external financing to support a level of national income that is largely geared towards consumption are also those most likely to be severely imbalanced)
• Accumulation of net external liabilities to GDP
• Starting point in terms of misaligned asset prices o Level of real rates (using 1y -
1y forward inflation expectations) o The
degree of FX
overvaluation relative to GSDEER (proprietary GS model for ‘fair value’)
Brazil has a low ranking on most. The Philippines emerges with a larger number of low rankings than high ones, and there is also evidence
of vulnerability for
South Africa and Thailand. India is particularly exposed in terms of current account
deficit position
while Poland and Hungary are vulnerable because of high foreign ownership of their debt. On the other hand, Taiwan, Singapore, Malaysia, Korea
and Indonesia rank highly on many counts.
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