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The Emerging EMEA Trading Team U.S. Federal Reserve Board Chairman Ben Bernanke hinted last month that the central bank might soon begin scaling back its monthly $85 billion in bond purchases — words that immediately sent world markets into a tailspin. Although investors know that quantitative easing can’t go on forever, they are fearful that a too-abrupt exit will shatter fragile economic recoveries.
Nowhere is that anxiety more pronounced than in emerging markets, where for the past few years economic growth has largely been fueled by easy credit.
“The sudden weakness of emerging-markets currencies and rising bond yields on the threat of QE tapering has led to deteriorating consumer growth expectations in emerging markets,” observes Richard Smith, head of Europe, the Middle East and Africa equity research at Deutsche Bank in London. “In addition, it would seem that lower real gross domestic product growth forecasts for China and its demand for commodities have also negatively affected sentiment.”
Andy Smith, head of equity research at Sberbank CIB in Moscow, believes the recent turbulence will be only temporary. “Many investors will return to emerging-markets equities when clarity about future plans for QE crystallizes,” he says. “Moreover, speculation as to higher U.S. interest rates has forced the revision of risk associated with emerging markets, which implies a correction on foreign exchange, bond yields and the equity markets. The market is searching for the new equilibrium, which we believe we are close to at this point.”
Not everyone agrees. “Emerging markets have lagged developed markets severely this year,” notes Terence Sinclair, Citi’s London-based head of EMEA research. “We expect that to continue.”
One thing is certain: Money managers will still look to sell-side analysts for guidance and insight into the latest political and economic developments. When it comes to the markets of emerging EMEA, they say no firm does a better job than Bank of America Merrill Lynch, which rises one rung to lead Institutional Investor’s 2013 Emerging Europe, Middle East & Africa Research Team. Deutsche Bank, which topped the roster for the past two years, slips to second place after losing two positions, bringing its total to 17. Citi’s count also falls by two, to 15; the firm dips from second place to third. Morgan Stanley, with nine spots again this year, repeats at No. 4 but shares the rank this time with VTB Capital, which jumps three places after increasing its team total by two.
The firm in sixth place is also the year’s biggest upward mover. Sberbank CIB vaults from tenth place after picking up two positions, for a total of seven. Survey results reflect the opinions of 537 individuals at 350 institutions globally that manage an estimated $364 billion in emerging EMEA equities and $130 billion in emerging EMEA fixed-income assets.
Like many research directors, Deutsche’s Smith expects the Fed to begin cutting back on bond purchases before the end of the year. “However, if this creates too much volatility in fixed-income markets — both within and outside the U.S. — then the feedback loop may lead to a more gradual approach,” he believes.
Although the central bank has an unrivalled power to calm or spook markets, ultimately individual companies must demonstrate their worth to portfolio managers. Alexander Pukhaev, who with Dmitry Dmitriev directs research at VTB Capital in Moscow, notes that investors have been pulling back from emerging-markets equities since the fall of 2010. “To put that trend in reverse, emerging-markets companies in aggregate must prove their ability to deliver better returns on capital and better dividend streams than has been the case for the past two to three years,” he says.
Read more in the July-August international edition of Institutional Investor magazine.