Warnings are rife across the financial world that emerging markets are likely to be the latest victim of the ongoing financial turbulence in the Eurozone. Liquidity is predicted by some to be likely to dry up, trade relations are becoming increasingly strained as further bailouts renew calls of unfair, protectionist, growth policies advocated by national governments, and as the US recovery is delayed.
The latest statistics from the Chinese economy proved to be weak, with lacklustre manufacturing data undermining future growth figures in various East Asian indices, including “Hong Kong’s Hang Seng index losing 1.3 per cent and China’s Shanghai Composite index stumbling 1.4 per cent to a two-month low”, and, perhaps more significantly, manufacturing has now contracted for 8 consecutive months.
As a result, hedge funds specialising in emerging markets have suffered significant withdrawals, with eVestment statistics showing that such funds have now suffered withdrawals for nine consecutive months.
Such depressed expectations in market which still hold a great deal of potential. Brazil’s main index, BOVESPA, is still 20% below its pre-crisis high in early 2008, but has the 2014 World Cup edging ever closer, an event that is sure to lift government involvement in the country’s infrastructure, simultaneously acting as a Keynesian stimulus and dragging millions of residents of the favelas of the main cities into gainful employment, tax rolls, spending and all the other benefits. It has the potential to amount to a shift characteristic of a demographic leap, if managed correctly.
India, too remains depressed, but it must be said that its issues are more engrained, as theirs are more socio-political, rather than economic.
Perhaps, therefore, such a flee from funds specialised in emerging markets may be misguided, investors ought never to forget that risk is never too high at the right price. At current prices, with historical trends to support this thesis, Brazil, India and China remain markets with huge growth potential in the near future. The short term outlook may look bleak as their trading partners struggle, but hedge funds are not in the game for short run profits.