Emerging markets have encountered severe turbulence in the past 3 months. Central bankers are at the center of the rocky ride, with U.S. tapering concerns serving as the trigger, and the emerging market central banks in the midst of disaster control as we speak. As Bloomberg noted this morning:
The risk that the Fed’s trimming of bond buying will hurt economies from India to Turkey by sparking an exodus of cash and higher borrowing costs was a dominant theme at the annual meeting of central bankers and economists in Jackson Hole, Wyoming, that ended Aug. 24.
The moves in emerging market currencies one symptom of this debate. But what fascinates me when asset class price action becomes a “dominant theme” among policymakers is that it generally only grabs their attention when prices are moving lower. Very little has changed in these economies in the past 6 months ago besides asset prices – but all of a sudden, the policy prescription is drastically different.
Another way of demonstrating what I mean is to look at the chart of some of the best-performing emerging markets during this bull market. Here are long-term monthly charts.
The Philippine Stock Exchange Index:
Indonesian Index (Jakarta Composite Index):
Monthly chart of the Stock Exchange of Thailand Index:
Monthly chart of the Turkey Borsa Istanbul National 100 Index:
These countries were some of the biggest beneficiaries of emerging market economic and credit growth over the last 5 years. From the 2008-2009 low, the Philippines, Indonesia, Thailand, and Turkey stock indices all at least tripled, huge moves for a 5 year time frame.
In that context, is it such a surprise that asset prices in these countries are hitting a roadblock in the past few months? The good times in many cases set us up for the bad times, as great expectations often lead to burnt aspirations. The long-term bull case for these markets is still strong. But over the next year, question marks loom over whether markets priced in too much optimism in too short a time for these enticing growth stories. Even trillion dollar central bankers don’t have the answer to that.