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Is the worst over for EM/SA?

Is the worst over for EM/SA?

It is now a week ago that Brian Dames exited as Eskom CEO. And the more distance one takes, the more it would seem that our electricity challenges are far from over. They may only be really beginning, however challenging that may be.

Can the same be said about SA, and indeed its Emerging Market (EM) class, or is this wildly off the mark? Which way will the wind blow? And will it be a fair one, or a tempest?

The first inclination may be to tot up the looming challenges, not just for us but for the entire class, call it a cliff and call for a parachute. That in fact is what markets did for most of 2013. But will it apply equally to 2014 (and beyond)?

Recent weeks have been very different as EM markets rallied. Those EMs most exposed to Fed bond buying tapering last year, and sold off in stages, appeared to be strongly rallying, to the point of suggesting the worst may be over.

There are two dimensions here.

The one is internal conditions in each of the EMs at risk. Here there is in nearly every instance evidence of rebalancing going on, with internal demand, imports and current account deficits shrinking. Also, the most fragile are all up for election this year, with a growing sense of post-election pro-activity regarding structural reforms. Never enough, of course, but still needed down-payments.

Also, many have raised interest rates, in some cases aggressively, with monetary policy no longer as loose as it used to be.

In an overarching sense, there is hope on some Chinese stimulus to ensure its growth target of 7.5% remains feasible, even while the Russian threat could keep receding.

Most importantly overall, however, is that markets seem to have progressed in digesting the uncertainty accompanying the Great Unknown called the tapering of Fed bond buying. Whereas last year this still caused many to sense risk, and instilled a great willingness to walk away from EM, imposing major sell-offs, and reimposing a more distinct risk differentiation, today global markets seem a lot more self-assured.

Tapering turned out to be not quite the terror it was thought to be, and sold-off EMs in many cases started looking attractive again, always relatively speaking.

Thus the fashion now is to take tapering in stride, indeed ignore it as yesterday's story and preoccupation. Today EM is sold-off, re-establishing their risk/reward attractiveness, making it a renewed buy for some.

But does this amount only to near-term stabilization or is this already a longer term watershed staring at us?

After all, Fed tapering will only end later this year, followed by a longish pause, after which the real meat of adjustment (interest rate hiking) will commence, probably from late 2015 and stretching through to late 2018.

That is a massive cliff still to be scaled, a long road to travel to full Fed policy normalisation. What strains and stresses will this still unload on markets, and what will these in turn still impose on EMs?

These are highly relevant questions, but I don't think we are without guidance from markets. Many investors seem to have digested Fed plans much better today than a year ago, with EM political risks also better priced in.

There is a learning curve operational here, and it signals renewed greater comfort with EMs after the uncritical blinkers of recent years had been removed and market ratings had been more appropriately adjusted.

There remain many willing to indicate that many EM Fragiles retain external vulnerabilities, with the Fed still having to move a great distance with rates, and markets having to adjust to these realities.

The Fed policy adjustment will of course be accompanied and be a reflection of an improving US economy, rather than a shock decision to address excesses.

There is a world of difference between how the one can hit you, while the other can be taken in stride, especially when gradually applied with the intention of keeping US growth proceeding healthily rather than ending it.

The US today is a growth prop underneath the world economy rather than US (inflation) excesses a Volckerite Sword of Damocles overhanging hopelessly leveraged Third World debt as it did in the early 1980s.

To some, global markets coming back into favouring EMs represents pessimists capitulating, which they do not see as being the same as optimists uncritically restarting their EM engines.

In other words, the shorts have been shaken out, restoring some balance to markets, but a concerned undertone regarding EM remains. Yet this is still a bit of a fashion, too, in today's highly critical and aware environment.

Global markets probably overreacted where EMs were concerned this past year. With the shake-out approaching completion, there is room for a more balanced, nuanced, less knee jerk, even hysterical view.

For EMs haven't gone away. Their growth potential remains. They are reforming stories, even if often in a distant kind of way. Importantly, neither China or the Fed may offer a deadly embrace shortly, with their respective adjustments better understood and digested, too.

It won't solve our SA electricity shortage quickly, or give us quick labour market reforms now direly needed, or give a faster current account deficit adjustment or necessarily make the SARB less cautious than it is.

But it would help us a great deal if the world were to be less trigger happy, having regained a better grip on some of the EM challenges, and the greater adjustments the world is still facing, injecting a less frenetic mood, and a greater willingness to acknowledge the growth potential that undeniably remains.

Lighten up, we are in repair and recuperation mode, not facing the next crisis.