No-taper day last week shot a syringe full of steroids into emerging markets. The widely traded iShares MSCI Emerging Markets ETF
(NYSEARCA:EEM) jumped by more than 4% as soon as the US Federal Reserve Board announced it would not, for the moment, curtail its $85 billion-per-month bond purchases after all. So why aren’t the men and women who run the “Fragile Five,” Morgan Stanley’s clever catchphrase for the developing economies most vulnerable to the end of quantitative easing, smiling?
We all know the standard narrative by now. The Fed’s massive money printing has kept US interest rates at record lows, pushing a torrent of liquidity to the far corners of the earth in search of a decent yield. Emerging markets have lapped this up, using it to finance unearned growth and way more imports than was good for them. A post-QE US tightening will reverse these massive flows, sucking the air out of manifold bubbles in the Fragile Five – India, Brazil, Indonesia, Turkey, South Africa -- and beyond.
So an unspecified, if not indefinite, delay in the Fed’s taper should logically have been cause for celebration. All the more so as emerging markets already started rallying in late August. At this point EEM is up 13% over the past month, regaining almost all the ground it lost after Ben Bernanke first suggested a QE slowdown was coming in May.
Yet the people in charge of those vulnerable markets sound anything but relieved. "We have been addicted to an easy money environment for four years,” Boediono, the single-named vice president who has steered Indonesia’s economy since the 1998 Asian crisis, told the New York Times.
“We have to really, fully adjust to a new normal.”
“Certainly we are going to get some headwind rather than tailwind,” Turkish finance minister Mehmet Simsek told the Financial Times
. Growth is “just not going to be as strong as in the past.”
Indian central bank chairman Raghuram Rajan did not say anything. He just stunned the world (that part of the world that follows such things) with a 25-basis-point rise in the country’s prime lending rate, signaling his job was to whip inflation before stimulating an economy that is growing at its slowest rate in many years.
Talk about taking away the punch bowl.
There are two ways of looking at this dour response. The short-term view is to conclude that emerging markets’ problems are far from over. The insiders who should know best are lining up to confess that the recent years of liquidity covered a multitude of structural sins, and the price needs to be paid soon, if not today.
Yet one is also bound to admire the candor and integrity of high officials whom one would naturally expect to fudge or perform PR gymnastics, at least if they were employed in the United States or most other advanced democracies. (Angela Merkel may win elections with unvarnished realism, but that is Germany.)
More than admire, actually. Investors generally list the virtues of emerging markets as young populations, an early stage of industrial growth, consumers storming into the middle class, and so on. A less valued asset is a cadre of financial managers who combine world-class preparation – India’s Rajan was a professor at the University of Chicago, Turkey’s Simsek a banker at Merrill Lynch – with a toughness and flexibility bred of surviving and overcoming the various crises of the 1990s and early 2000s. These mandarins often produce better results than their Western colleagues. Much unlike 15 years ago, big developing countries tend to have a much better grip on budgets, debt, and reserve levels than the US and Europe.
That is not to say that emerging markets are a higher civilization. The smart folks up in the finance ministries and central banks have, at best, uneven success pushing their visions down to the ground level of government where roads are built and laws enforced or not. Only one EM of any size, Chile, ranks among the 40 most honest countries in the world, according to the latest Corruption Perception Index
compiled by global NGO Transparency International. That is a big problem which is not getting much better.
But it is hard not to think we could use a few Boedionos (Wharton School ’79) scattered around Washington, which is hurtling toward its latest round of insane fiscal chicken after four-plus years of steadfastly refusing to grapple with the country’s most obvious problems. Harder still to believe that America is really back on top again, as markets have implicitly argued for the past year. The efforts of these grown-up leaders far beyond our borders will pay off sooner or later.
No positions in stocks mentioned.
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