Fed taper, China data keep emerging markets on edge

Written by fe Bureau | Mumbai | Updated: Jan 31 2014, 06:24am hrs
FedEquities & currencies lose ground, rupee closes at 62.5750. Reuters
World markets remained jittery on Thursday, as outgoing US Federal Reserve governor Ben Bernanke scaled back the ongoing stimulus programme by $10 billion to $65 billion a month. Mounting evidence of a slowdown in the Chinese economy manufacturing PMI for January came in at 49.5, the first deterioration in six months continued to weigh on emerging markets (EM) assets as interest-rate increases by Turkey

and South Africa failed to stem a rout in developing-nation currencies.

The rupee lost 0.27% on Thursday to close at 62.5750 while most other EM currencies lost between 0.09% and 1%. Twenty of 24 EM currencies tracked by Bloomberg have weakened against the dollar since January 28.

Key Asian indices including Straits Times, Shanghai Composite and Hang Seng lost between 0.48% and 0.79%, while Japans Nikkei 225 declined the most by 2.45%. Major European indices also opened weak, with the FTSE 100, DAX and the CAC, trading down anywhere between 0.25% and 0.28% at about 5.00 pm IST. On Wednesday, the Dow Jones gave up 1.19% to close at 15,738.79 points.

Veteran emerging markets investor Mark Mobius wrote on his blog on Thursday that, for short-term investors, the type of sell-off like the one we have seen in the markets recently can be very worrying. Thats why, to some degree, we will see money quickly jumping out of what are deemed to be risk assets, which include emerging market equities.

Mobius, however, pointed out that investors were reading too much into Chinas slowdown. Worries again are surfacing about the pace of growth in China after some disappointing recent economic data, he said.

The reality is that China is still growing at a very rapid pace. If China can achieve a growth rate in the range of 6-8% this year, it would be incredible for any economy of that size, Mobius said.

Bloomberg reported that investors are pulling money from exchange-traded funds that track emerging markets at the fastest rate on record. More than $7 billion flowed from such ETFs in January, the most since the securities were created, data compiled by Bloomberg show.

India's benchmark indices faithfully followed global cues, falling for the fifth consecutive session to their lowest level since November 27.The BSE Sensex lost more than 300 points before recovering smartly in the last hour of trade on short-covering; Thursday saw the expiry of derivatives contracts. The gauge ended the session down 0.72%, or 149.05 points, to 20,498 points. The broader Nifty slid 0.76%, or 46.5 points, to 6,073. The Sensex has now shed 875 points, or 4.09%, in the last five sessions after surging to a lifetime high of 21,373.66 last Thursday; approximately R3.06 lakh crore of investor wealth has been eroded. Foreign institutional investors (FIIs) sold shares worth $68.7 million on Thursday. In the last five sessions, they have offloaded shares worth $478 million though net purchases in January are about $41 million.

The US economy has recovered a lot quicker than expected and this has caught several emerging markets by surprise, said Andrew Holland, CEO, Ambit Investment Advisors. A broader selloff in the emerging markets now seems likely, which means FIIs could start selling Indian shares as well.

Morgan Stanley said in a report that the MSCI EM index has fallen 7.1% in the year to date, the fifth worst start to the year since 1988, extending last years underperformance versus developed market (DM) equities. The report points out that EMs are plagued with a number of core structural problems such as transitioning growth models and slower GDP growth as well as funding vulnerabilities and FX adjustment pressure given a rising global cost of capital. Besides, a number of countries are currently impacted by political risk events. On Thursday, Thailands SET Index lost 0.6 percent before snap elections due on Feb. 2, set for a third-straight monthly decline. Markets in South Korea, Taiwan and Vietnam were closed for holidays.