Investors Turning Away From Emerging Markets as European and US Recoveries Begin to Gather Pace

Life is all about the balance between risk and reward; what could I suffer for what I desire? Get to where I want to go quickly and take a dangerous shortcut or maybe take the path that most travel and just be happy to get there safely. This balance of loss versus gain is what drives investment more than anything.

Life is all about the balance between risk and reward; what could I suffer for what I desire? Get to where I want to go quickly and take a dangerous shortcut or maybe take the path that most travel and just be happy to get there safely. This balance of loss versus gain is what drives investment more than anything. Investors must weigh up the fear of a loss against the prospect of profit and decide whether the play is worth it or not.

Emerging markets have been the investment choice for years; combining a high rate of return and, in some cases, double-digit growth rates. A frequent refrain from Conservative politicians against the Labour government in the UK is that they did not 'fix the roof while the sun shined'. India's government had more sun than us and a far bigger hole in the roof. Markets were kept inefficient, barriers to trade weren't loosened, and lessons were not learnt. However, the money kept coming in.

With the advent of loose monetary policy in the western world - in response to the credit crisis and the ensuing recession - investing in the US, Eurozone or UK became unattractive. Yields were slashed as interest rates were cut to basically zero. Additional stimulus from quantitative easing was created and, using back of a napkin calculations, an additional $10trillion of new money emerged that needed to be invested somewhere.

The worm has turned, however, with the belief that the free money party may be coming to an end. The improvement in the economic prospects in the United States has pushed the Federal Reserve to begin to start preparing the market for the reduction of its asset purchase plan - the normalisation of monetary policy of the world's economies will be the key battle for central banks in the 2nd half of the decade. The reduction of QE means less new money out there to look for an investment destination.

Economies such as these have long depended on less reliable forms of foreign funding of current account deficits than typically stable foreign direct investment. No funding means little inward investment and that means dramatic slashes to growth. Throw in rising yields in Europe and the US and the average investor no longer wants the risk of these emerging markets.

The weakness can persist for years; the Asian crisis of the late 1990s started in 1997 after a collapse of the Thai baht and signs of recovery were little seen until 1999. The reforms that are needed to fix these structural issues take time as well - in India they've been trying to enforce measures to reform a listless banking sector, cut red tape and eliminate barriers to inward investment since 2011. The seeds of indifference do not bear nourishing fruit as the Indians are finding out now.

The financial world was strong enough to contain the Asian and Latin American crises of the 80s and 90s; it is not going to be strong enough to sustain another one now.

Close

What's Hot