2nd Knock Down for Emerging Markets. Tapering Fears Way Overdone

Emerging markets took one in the chin, and now, it is taking another one in the gut. Both hits originated from the fear of tapering, which is undoubtedly, overblown. The second fear is the fear of a potential fallout from a military strike on Syria, which is again, another factor which should not even affect global markets too much, but is used as an excuse as a sell off.

The Background Behind Syria Civil War

Syria's Civil War started in April 2011 as a result of a series of demonstrations inspired by the Arab Spring. Since than, the Syria Civil War has reached a stalemate between the Government and the opposition forces. Political commentators have remarked that the Syria War functions also as a proxy War between the Sunni (Turkey, Qatar, Saudi Arabia) and the Shiite (Iran, Iraq) states. It can also be seen as an influence war between the ailing Western allies (US, Europe) and the up and coming superpowers (Russia, China). The impact of the Syria Civil War will have more implications on the political arena and influence rather than on the economic front. The economic sanctions (includes oil embargo) that was in place by the Western Powers since 2011, should have minimal impact on any important commodity such as oil, as most of the countries stopped importing oil from Syria anyway. That might be some fears and uncertainty in the middle east due to the Civil War, but the impact from past Middle East crisis, such as the Arab Spring, Iraq War and Afghanistan War, have actually minimal impact on the economic prosperity on a global scale. So how much can a series of missile strike on Syria will actually create an economic tsunami big enough to derail the global economic front? At this moment of time, the Western allies have no stomach for a prolonged land mission, as they are struggling economically to restore their ailing economies. Therefore, any argument that the recent incidents will lead to a major market correction and a spike in oil prices are probably bogeymen created by market makers to scare off the retail investors, while they slowly and quietly accumulate the assets of emerging markets, which has been badly mauled in the past few months. These concerns will fade in a few months time as the market starts to rally again.

The Sharp Fall of the 3Rs (Rupees, Ringgit & Rupiah)

The top losers of the recent emerging market selloffs are probably India, Malaysia and Indonesia. On top of a sharp fall in their stock markets, their currencies were so badly hit that the governments have to intervene to shore up their currencies in order to prevent a panic in their role of global commerce. The 3 currencies lost 11%, 10%, 5% respectively in a short span of 3 weeks, leading to fears of a sharp rise in inflation as important commodities such as oil, which is priced in USD, became 10% more expensive almost overnight. This created problems as inflation in these countries are already high and forces them to tighten their economic policies, just as the economies of these nations are slowing down. Singapore SGD, Thai Baht and Philippines Peso are similarly affected as part of the selloff of SEA currencies but are lesser affected. The tide of hot money outflows seems to have stemmed in the past few days and the financial markets started to recover from the onslaught.

There has been little doubt that emerging markets, with their huge surplus, will be able to weather this storm as the speculators retreated. The question is, how will they fare a few years down the road, as emerging market slowly depleted their reserves to shore up their currencies and the flow of easy money starts to slow. Will it be a crisis many times of the magnitude of the recent sell-off of emerging markets assets? That is something that we have to always keep at the back of our minds as the global economic story develops.

Our Portfolio Strategy

To be honest, I didn't expect the second smack down on emerging markets, thinking that the first major correction is the BIG one for the year. Well, Mr Market do love to tease market forecasters with twists and turns as complicated as a Korean period drama. Thailand and Turkey funds were badly hit in the second mauling of emerging markets equities, losing as much as 10% of its value in a month's time. The American funds did much better and the 2 funds which I switched into recently, actually gained in the month of August, despite a minor correction the the US equities itself. They have also outperformed the Singapore Bond fund which I would have kept if I did not switch out to US small-mid caps equities. Equities in the Emerging Markets should pick up shortly as the reignited US economy will prove to be a boon to the export oriented Emerging Markets. I feel that we have picked up Turkey and Thailand at a reasonable good price, even though now that they are even more attractive right now. September might be another turbulent month as the US congress wrestle with the Debt Ceiling again but markets should be smooth sailing into December.