Emerging Markets in a New York Minute

For me the EM switch flipped in 2012. We’d had inflows and bull markets for 12 years–well before QE. Now, the outflows come. Doesn’t matter what the trigger was. It’s on. It was just a matter of time.

The path, the tricky part, will be in fits and starts. Valuations won’t matter until we can tell a compelling growth story, and too many EM countries have to work through all the domestic debt they built up during the boom. Currency spasms and deleveraging raise the risk of policy errors in certain cases. EM fixed income is most vulnerable because outflows haven’t really even started there. And it would be worse if I were really bearish Treasuries, which I’m not. 

People will overstate how bad fundamentals are as price action worsens. Tourists (crossover investors), who are in control of the flows, will mostly revert to old school EM biases, even though many things, fundamentally, are different (better) this time. Gone is the fixed FX regime and the original sin. Domestic EM financial markets are deeper. Reserves are higher. But don’t try and fight the Old School and their anachronistic biases. They are bigger than you are.