Emerging markets’ flu’ is blamed in wake of Fed’s tapering cutback

The recent rally in stocks in the Emirates will be severely tested today as local bourses reopen after a global markets sell-off gathered pace on Friday.

In the United States, stocks fell the most in more than seven months, with the benchmark S&P 500 stock index retreating 2 per cent. It reflected a spillover of concerns about emerging markets focused on the impact of the withdrawal of the US Federal Reserve’s quantitative easing policy, stalling growth in China, as well as political concerns in Ukraine, Turkey and Argentina.

Investor focus will switch to local markets today, experts say.

“You might see a mild sell-off. Dubai will be worst affected as it has the best run to date,” said Ali El Adou, a portfolio manager at The National Investor, an Abu Dhabi-based investment management and advisory firm.

To date, GCC stocks have remained relatively unscathed by the steadily increasing exodus of investors from emerging markets in recent months.

On Friday, an MSCI index of emerging market shares lost as much as 1.6 per cent. Since mid-October the index has shed more than 9 per cent. In contrast, the Dubai Financial Market General Index is up about a quarter over the same period.

Much of the rise in local shares has stemmed from a pick-up in earnings growth as the economy has strengthened. Investor interest is also building ahead of May when the UAE and Qatar are expected to be upgraded by the index compiler MSCI to emerging markets, from frontier status.

“Although the UAE and Qatar are part of the MSCI emerging market index, they have dollar economies which other emerging markets don’t have. This should help shield them,” said Mr El Adou.

Currencies of other emerging markets suffered heavily during Friday’s sell-off.

Turkey’s lira hit a record low as the cost of insuring against a Turkish default edged up to an 18-month high. Argentina’s peso also dropped, a move hastened by the country’s central bank removal of support for the currency.

“The world is suffering from the emerging markets’ flu,” Michael James, the managing director of equity trading at Wedbush Securities in Los Angeles, was quoted by Reuters as saying.

Emerging markets had a strong run in the aftermath of the global financial crisis of 2008-09. They were boosted by a flood of investment in search of high returns as America’s central bank tried to boost flagging domestic growth by pumping billions of dollars into its financial system.

As the economy in the US recovers and the Fed starts to taper its stimulus, investors are looking closer to home for returns.

Adding further fuel to the sell-off has been signs of wilting growth in China, the world’s second biggest economy. Political troubles are also denting the appeal of Thailand and Ukraine, as well as Turkey and Argentina.

tarnold@thenational.ae

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