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By Oren Laurent
President, Banc De Binary
As the New York stock market rushed to record highs before Christmas, shares in Shanghai were looking more vulnerable. On Christmas Eve, desperate to avoid a second credit crunch in six months, the People’s Bank of China pumped $2.9 bln into the money markets to help cash-strapped lenders and lower the interbank rates. This cash squeeze is a symptom of Beijing’s attempts to reduce the banks’ reliance on cheap capital and is why the MSCI China Index has been fairly flat throughout 2013.
In the New Year’s spirit of reflection and analysis, I want to devote this column to digging deeper into the topic of emerging markets, a topic that greatly interests me but also casts clouds of uncertainty over many investors. What was the story of the emerging economies in 2013 and what will 2014 bring?
We can say with certainty China is not struggling alone. All of the emerging markets have been affected by the West’s progress. As the developed economies have climbed out of recession, they have cut back on the trillions of dollars in stimulus that they were injecting into the global economy, dollars which the emerging markets had become accustomed to. The U.S. Fed Reserve has been leading by example and will continue on the same path in 2014, scaling back its asset-purchase programme by $10 bln from January.
China’s growth, although still positive, is expected to slow from 7.6% to 7% next year, and Russia’s economy has already been stagnating in recent quarters. Particularly vulnerable will be the emerging economies with current-account deficits, including Brazil, India and Turkey, because of the risk of capital flight.
However, while many Western investors are being cautious and steering away from these economies to funds closer to home, it is important to note the specific markets which are in fact thriving. Vietnam equities for example have outperformed their emerging market peers, a trend which is expected to continue in 2014. Foreign investment remains healthy and the benchmark VN Index was Southeast Asia’s best performing index of 2013, enjoying a rise of 23%. The country’s economy is expected to grow at around 5.5% this year, a healthy rate for long-term economic progress.
Additionally, the export driven economies with strong balance sheets, like South Korea and Taiwan, are set for success in the current financial climate. Their potential export gains in light of the global economic pick-up will add to the value of their currencies. Analysts have estimated that the Taiwanese dollar could climb 2.5% over the year.
So, as the bigger picture tells of a shift back from developing to developed countries, the real money is in the details. As part of a diverse portfolio, investors may do well from a few carefully selected long options in the emerging markets.
On behalf of the whole Banc De Binary team, I wish all my readers, friends and fellow traders a happy and successful year ahead.
