Saxo Capital Market Asia macro strategist Kay Van-Petersen said emerging markets are likely to fall further before it begins to improve.
“I think there is a lot more downside to come, with things set to get worse before we see the light at the end of the tunnel,” said Mr Van-Petersen.
“My thesis is simple: much of the cheap money that came out of the [US Federal Reserve’s] quantitative easing, as well as China’s massive stimulus during the financial crisis, has inflated assets heavily across the globe.
“Global growth is decelerating, commodities have yet to find a floor, and EM assets have yet to catch up with the continuing deterioration of macro fundamentals.”
Saxo chief economist Steen Jakobsen said the current volatility evident in emerging markets is a product of the “pretend-and-extend” cycle.
“The ‘pretend-and-extend’ policy triggered a negative vicious cycle whereby EM-issued, dollar-denominated debt was converted into local currencies. Then, the stronger dollar increased both the debt burden and lowered commodity prices, a main export for many EMs.
“In turn, this meant less demand and less growth for EMs. This happened in a world economy based on fiat money, dollar reserves, dollar-denominated commodities and debt and a rising US dollar,” he said.
Mr Jakobsen argued, however, that the “perfect storm raging through emerging markets is also the biggest opportunity in decades”.
“The fact that we are in the midst of a perfect storm should not fool us into believing the sun will never shine again,” he said.
According to Mr Jakobsen, due to liquidity and access issues the best way to invest in emerging markets is through FX trades.
Mr Jakobsen noted that the sector is not deep enough to facilitate robust equity markets. He also pointed out that academic studies show that 80 per cent of all emerging markets returns come from FX.
Mr Van-Petersen suggested that investors look to countries like the Philippines, India and Mexico, believing that they will begin to outperform on a relative basis.
