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Emerging markets exposed to external shocks but IIF delegates see opportunities


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Emerging markets exposed to external shocks but IIF delegates see opportunities

Emerging-market economies will always be vulnerable to events in the developed world and can do little to avoid selloffs such as the recent rout on emerging-market portfolios, according to Jacob Frenkel, chairman of JPMorgan Chase International, but asset managers remain interested in the sector.

Fiscal crises in Argentina and Turkey sparked a rout in emerging-market currencies earlier this year, but while Frenkel told the delegates at the annual gathering of the Institute of International Finance in Bali, Indonesia, on Oct. 12 and Oct. 13 that countries can protect themselves to an extent with a strong financial sector, responsible fiscal policy and flexible exchange rates, they will always be subject to the whims of the developed world.

"These recent crises have all originated in the industrial world. The [emerging markets] are on the receiving side. The truth in the matter is they can't do much about it except have defensive policies," Frenkel said.

Sanctions shock

The latest shock to hit the emerging markets is the rising price of oil, a key component to growing economies. U.S. sanctions policy has squeezed Iran out of supplying oil to much of the world, with the result being higher oil prices hitting emerging-market economies, particularly oil-hungry India, which has seen its currency devalue sharply this year.

Similarly, the South African rand has taken a hit and the economy has entered a recession as a dip in external demand weighed on commodity prices for precious metals such as gold.

"While India is quite similar to the emerging-market pack, it's also different. India is a significantly more domestic-led economy. Secondly, when you look at leverage, external debt is 20% to 23% of GDP, and this number has remained stable. Leverage is under control and largely domestically controlled and so less impacted by the debt," said Vijay Chandok, executive director of ICICI Bank.

Generally delegates at the IIF event saw value in emerging markets, with some suggesting that issues in Turkey had led to the market overselling the space. "[Turkey's] currency is very cheap, but at the same time you can't call the bottom because of the vulnerability of the banking sector," said Claire Dissaux, head of global economics and strategy at Millennium Global Investments.

"The question for Turkey is how the government regains credibility. How will [President Recep Tayyip Erdoğan] react to a recession? The current-account deficit is only part of the problem; the other part is the foreign-currency liability. So we don't know if the bottom is there yet," Dissaux said.

However, others said quantitative tightening by central banks and slower economic growth among emerging-market economies made the sector less attractive long-term for portfolio managers.

"Capital is becoming more expensive, much more expensive, and the competition for capital is going to get much more intense, and by and large [emerging-market economic] policymakers have not caught up with that," said Scott Grimberg, a portfolio manager for global fixed income at the California Public Employees' Retirement System.

He said there remain too many hurdles to invest in many markets. "I see pretty strong institutional and structural barriers to investing in China, Indonesia. India is nuts," he said, adding that Latin America is the only region that "actually wants my money."