Emerging market traders fear 'meltdown' aftermath
By Päivi Munter in London
Published: May 9 2004 22:11 | Last Updated: May 9 2004 22:11
Emerging market debt traders will on Monday return to their desks in an apprehensive mood after fears of higher US interest rates last week drove about $10bn in investments out of the asset class.
JP Morgan's EMBI+ emerging bond index fell 5.4 per cent on the week, representing the steepest mark-down in two years and enveloping the entire market.
Paul Luke, chairman of UK hedge fund Convivo Capital Management, said: This is a real meltdown - all the assets have fallen. The last time we saw something like this was in 1998 during the Russian crisis."
Last week's selling started as US economic data early in the week raised the spectre of a rise in interest rates.
By Thursday, when weekly jobless claims figures fell sharply, the momentum was fierce, and Friday's jump in the number of new jobs left investors running for cover.
Jonathan Bayliss, head of quantitative strategy at JP Morgan, said: "Most of the selling has been from hedge funds, but as the week wore on it broadened to real-money investors."
Hedge funds are by nature more aggressive investors as they can "short" the market, or sell securities they do not own. "Real-money" investors, such as pension funds, tend to be more conservative.
Signs of their apparent surrender left market participants worried about a further slide in bond prices.
"As the selling continues, there is a risk that people may start questioning the asset class as a strategic proposition," Mr Bayliss said.
Five years ago, Russia defaulted on $40bn in domestic debt, leaving many international investors badly out of pocket and emerging markets with a bad name.
But subsequent emerging market crises have been more limited, giving rise to perceptions that the asset class had "matured" since its inception in the early 1990s.
The exceptionally low global interest rates over the past three years helped rehabilitate emerging market debt, because risk appetite rises when money becomes cheaper and yields on mainstream assets fall.
But the creditworthiness of developing countries improved, too, as they abandoned currency pegs and lifted their budgets into the black.
The policies of big emerging market governments - such as Brazil and Turkey - have recently been more disciplined and predictable.
John Cleary, chief investment officer at Standard Asset Management, said: "Emerging economies and politics are broadly positive. The volatility has been driven by exogenous, rather than fundamental factors."
But the economic environment is marred by uncertainties, such as oil prices approaching $40 per barrel.
Susan Payne, chief executive officer at Emergent Asset Management, said: "We are negative - we think the market correction will go further." |
