May marks the one-year anniversary of the Bernanke bombshell, remarks from the then chairman of the Federal Reserve that sent shockwaves through financial markets. What he said was uncontroversial but it sent a powerful message. The US monetary stimulus that had underpinned global markets could not continue indefinitely. For investors in denial about the eventual end of quantitative easing, it was a message no one wanted to hear.
Hardest hit were emerging markets as investors decided that less monetary stimulus would lead to a return to the US of a wall of money that no longer felt the need to chase the higher-but-riskier returns in the developing world.
The countries most vulnerable to this change in sentiment were those that had allowed themselves to become dependent on inward investment. Brazil, India, Indonesia, South Africa and Turkey found themselves grouped together as the “fragile five”. Their equity and bond markets tumbled along with their currencies.
Taper tantrum
This “taper tantrum”, as it became known, justified a growing conviction that investors’ love affair with emerging markets was on the wane. The conventional wisdom said that developed markets, especially the US, would lead the next leg of the market recovery.
It wasn’t an unreasonable position to take at the time. A housing-led US recovery looked to be firmly entrenched; the US dollar seemed to be on the cusp of a multi-year rally as the country’s twin deficits dwindled; and the shale revolution held the promise of a US manufacturing renaissance.
By contrast, many emerging markets had set unsustainable paths when interest rates were low. Their current accounts were in disarray and their export-led models were in need of a rethink.
On the face of it, the performance of stock markets over the past 12 months has been exactly what you would have expected against this backdrop. The S&P 500 Index has outperformed the MSCI Emerging Markets Index over one year. US shares are close to an all-time high, up 15%, while emerging markets as a whole have pretty much moved sideways since May last year.
No such thing as typical
But look a little more closely and it is clear that the concept of emerging markets is unhelpful as an investment catch-all. There is no such thing as a typical emerging market and the countries captured under this heading have performed differently over the past year.
Let’s just take three of them, ones that have been in the news of late. First, India, which over the past year has more or less exactly matched the US market, although it has taken a different route to get there. In the first nervous months after Ben Bernanke’s comments, the Sensex Index in Mumbai was one of the world’s worst performers, dragged lower by investors’ despair at the country’s slowing growth, inadequate infrastructure, corruption and bureaucracy.
But in more recent times, however, India’s stock market has been caught up in a frenzy of Modimania, the belief that the country is on the brink of a Thatcher moment now that Narendra Modi is in charge. Rarely can investors have placed such an unambiguous bet in a new leader.
A stock market that has more closely matched investors’ expectations has been Thailand. It tracked India lower last year and has stayed down, correctly anticipating yet another military takeover. Thailand now offers investors twice the dividend yield they can achieve in Mumbai today as compensation for the risks of investing there.
Never heard the warning
At the other end of the scale, Dubai looks like it never heard Bernanke’s warning at all. The story there has been a happy combination of renewed growth, rising tourist numbers, a resurgent property market and the promise of passive money flowing into the Gulf after the market’s upcoming promotion from frontier to emerging-market status. Dubai’s shares have more than doubled in the past year.
Even within individual emerging markets there have been plenty of opportunities to make and lose money. Chinese internet stocks have doubled since Bernanke’s comments, with the gloom and doom and rock-bottom valuations associated with investment in China restricted to Shanghai’s state-owned banks, energy and telecoms groups.
Generalisations are particularly dangerous in investment. When it comes to countries as diverse as those we insist on lumping together under convenient but unhelpful groupings, they can lead to expensive mistakes. The one thing that can be said with certainty about markets such as India, Thailand and Dubai is that their performances in the next year will be as varied as they were in the last.
