“A 1997-like feeling is again in the air,” says William Pesek on Bloomberg.com. Recent crises in emerging markets – including a coup in Thailand and riots in Hungary – are raising the spectre of nine years ago, when the Asian Tigers’ bubble burst and the fall-out spread through markets around the the world.
Problems certainly seem to be piling up at an alarming rate. On top of Hungary and Thailand, Brazil has seen a scandal ahead of the polls and Poland the collapse of the ruling coalition, says Steve Johnson in the FT. “South Africa revealed a worryingly wide current-account deficit and Ecuador hinted at a debt default.” Yet, apart from a sell-off in some of the riskier currencies and a few local equity markets, investor reaction has been remarkably muted – so much so that “one has to wonder: what does it take to scare investors these days”? says Nils Pratley in The Guardian.
Should emerging markets investors be worried?
There are some reasons for buyers to remain relaxed – Asia is a far healthier place than it was in 1997, says Pesek. “Banks are stable, foreign-currency debt has been sharply reduced, transparency has improved and massive stockpiles of reserves have been amassed to protect economies.” But on the downside, politics remain a problem, as demonstrated by the Thai coup. Meanwhile, many eastern European countries are in no better state than the Asian Tigers were in 1997, saddled with large current account and budget deficits and extensive foreign-currency debts. “Hungary, along with many eastern European economies, is heading for a train crash,” says Matthew Lynn on Bloomberg.com.
With this in mind, you would expect some evidence that investors were pricing in greater risk, but apparently not. For example, yields on emerging-market debt remain “irrational”, says Martin Hutchison on Breakingviews.com. “Maniacally-run” Venezuela trades at just 2.3% over US Treasuries, Russia – which “will feel no moral commitment to repay bondholders if times get tough” – at 1.2% and post-coup Thailand at just 0.58%. It seems that “there’s so much cash around the world that investors are ignoring genuine political risk in their hunt for returns”, says Pratley. “In other words, it’s old-fashioned complacency.”
Interested in emerging markets? See our investing in stock markets section for news and articles from markets around the world.