Brazil, Indonesia, Turkey, India, and South Africa were all hurt when taper talk started in May. Which ones will continue getting hurt and which ones will rebound? Two strategists give their take.
While the US markets rallied after the Fed announced the taper, should emerging market investors be the ones to worry?
Back in May, emerging markets around the world took a hit after Federal Reserve Bank Chairman Ben Bernanke told the US congress a taper could be on its way for its $85 billion monthly bond-buying stimulus program known as "quantitative easing" ("QE"). That triggered massive bond-selling as investors feared the loss of the market's biggest bond-buyer, the Fed.
Since lower bond prices mean higher yields, money began fleeing the emerging markets in May for now higher-yielding US dollars and bonds. In the month following Bernanke's May 22 congressional testimony, the iShares MSCI Emerging Markets ETF (the EEM) dropped 15%.
CNBC contributor Andrew Busch, editor and publisher of The Busch Update, thinks emerging markets will continue to underperform.
"What the FT calls the 'Fragile Five' – Brazil, Indonesia, Turkey, India, and South Africa – got hurt really badly," says Busch of the emerging markets selloff since May. "As a matter of fact, those currencies in those countries, after the Fed announced this week of their taper, those currencies – specifically, Turkey – have been getting hurt."
|Country||Index||Since 5/21||Since 12/17||Currency||Versus USD since 5/21||Versus USD since 12/17|
|Turkey||ISE National 100||-24.88%||-9.48%||TRY||-11.94%||-3.04%|
|South Africa||Dow Jones South Africa||-2.48%||3.80%||ZAR||-8.96%||-0.30%|
Turkey's problems are compounded by troubled leadership and social issues, says Busch. "If your country is not being managed properly and you've got political strife like they do in Turkey, your currency is going to get beat up and, of course, [your] stock market."
But Turkey isn't the only country with problems, according to Busch. As eyes begin to focus on Brazil next year starting with the World Cup and the Olympics in 2016, Busch sees the attention bringing to light the country's infrastructure problems.
Yet there may be one surprising bright spot in emerging markets, according to Jonathan Krinsky, Chief Market Technician at MKM Partners. That country is India.
"They had a lot of pain earlier this year but it's rebounded quite strongly," notes Krinsky. "It's right now back to the levels it saw in 2007 at the highs."
Looking at a long-term chart for the Bombay Sensex index, Krinsy believes a breakout to the upside may be at hand. However, Busch is a little more cautious.
"I think they've got some problems in the future because they have a big election in 2014," says Busch. "They finally have a central bank that understands inflation and they just held off from raising rates. That's helped fueled this equity rally but, in 2014, [there is a] lot of uncertainty there."
To see the rest of Busch's fundamental analysis and Krinsky's charts on India, watch the video above.
More from Talking Numbers:
- Investment & Company Information