EM BANDWAGON

2018-05-09 9am EDT  |  #emerging markets #EM #Argentina

I have been busy with some mundane non-market work stuff so I haven’t been following the ticks as closely as usual. Therefore, when I saw all the headlines referring to the “carnage” in the emerging markets sector, I was eager to dig in and see what all the excitement was about.

I was expecting some big declines and wondering if this was a chance to buy emerging markets amid the chaos.

Yeah, maybe emerging markets are struggling, but it’s far from the end-of-the-world that many are proclaiming.

In fact, when compared to previous EM sell-offs during the current cycle, this decline is relatively tame.

So what’s all the hullabaloo about? To some extent, the collapse of the Argentine Peso is spooking investors. Actually, maybe not investors as much as pundits.

But it’s easy to see why. The Argentine Peso has gone no-bid.

Faced with moribund growth, a stubborn inflation rate and most importantly, a smaller-than-expected soy harvest, investors have fled from Argentina more quickly than William Shatner at a Star Trek convention. But the best part of the story? It was less than a year ago that the Argentine government received $9.75 billion in orders for a $2.75 billion 100-year bond issue. Yup, you read that right. From CNBC:

At least the Argentine government had the good sense to hit a stupid bid when they saw it.

EM FX problems

Maybe the pain isn’t in emerging market stock indices, but rather concentrated in FX rates. After all, there can be no denying that the Argentine Peso is in free-fall. Maybe this contagion is spreading.

To make this point, many pundits are passing around the following chart of the JP Morgan EM FX Index:

This certainly looks frightening. But is it really?

Let’s back up and look at this FX index over a longer time period:

With the benefit of a little perspective, it is obvious that although EM currencies are weak, it is far from the catastrophe portrayed in the financial media.

The start of something? Or much ado about nothing?

I am not smart enough to know whether we will look back at the Argentine Peso’s decline and be able to point to it being the start of something more sinister, or whether this is just a hiccup in a broader EM bull market. But I know that the current sell-off is fairly benign in the grand scheme of things. Can you imagine the panicky articles we will get in a real crash?

Thanks for reading,
Kevin Muir
the MacroTourist