Yesterday the iShares MSCI Emerging Markets (EEM, quote) underperformed the S&P 500 (SPY, quote) by 2.9% which is the largest one day underperformance move I can track going back 5 years.
After the scary move yesterday in emerging market ETFS the question that is bubbling up on a few fronts
Is Thailand (THD, quote), yet again, the lynchpin to a global emerging market crisis that will send the world into crisis (see ’97/’98 history books)?
A lot of well-respected and smart market commentators are today asking that question…
My answer is NO.
Even with the c/a issues of the “fragile five” comparisons to ‘97/98 are not even close. Emerging markets have a public debt/GDP ratios that are around 25-30% (vs 90-210% in developed) which is very different than the hard currency debt burdens during the Asia Russia crisis.
Bottom line the balance sheets in emerging market are impeccable. There is not a credit event coming.
Hard currency reserves today dwarf where they were in ‘97/’98. Brazil has $375bn vs 52Bn in ’98. Even Thailand has $175Bn in USD reserves…far from going bankrupt.
Emerging market countries today have floating currencies which are ultimately an elixir for any economy that needs to adjust.
Currency pain now fragile five but it’s not systemic unless there is political crisis. Meanwhile currencies in places like South Korea are booming (29m high) and actually a headwind for the economy because of their strength.
The politics in Thailand are indeed scary, and the politics in Turkey are an issue for the first time in over a decade. These are specific and real problems related to these countries. China is the gorilla in the room and yes they have a credit problem but they are raising rates (trying to do it slowly) and this will be painful. If China cannot hold, I will change my tune.
I would be buying EEM on a trade here with significant support at $40.00 even though I do think emerging markets overall is not an easy trade here for medium term.
The move lower of Emerging Markets vs. Domestic Markets is significant and something that is near way oversold levels. You are at Sept 2005 levels on this spread which is 43% off the top in October 2010.