Nathan Rothschild

Even in the midst of an ongoing Euro-zone crisis with no obvious solution in view, investors have no trouble distinguishing between one European country and another, as the yield spread between German and Greek government debt (currently 860 basis points, or 8.6 percentage points) clearly demonstrates. Why, then, are investors so amazingly dense by comparison when it comes to emerging markets? Why do they – willfully, it seems – refuse to recognize that there are huge differences between, say, Chile and Venezuela, which lumping them together into an emerging markets basket or a Latin America basket can only obscure?

Ten days ago, while the Egyptian democracy movement was still gathering steam and uncertainty abounded as to the political fate not only of Egypt but of the entire Arab world, the Financial Times reported that investors had pulled more than $7 billion out of emerging markets equity funds during the preceding week. This was the biggest withdrawal in over three years, which the FT attributed to “turmoil in the Middle East and rising food inflation [which] raised fears of economic instability.” Egypt, it said, may have been the catalyst, “but the fund outflows also reflected deeper unease about economic overheating in China, India, Brazil, and other big emerging economies.” The article went on to quote several fund managers who said that developed markets now represent greater value than emerging ones and as proof pointed out that nearly all of the $7bn lost to emerging markets had been reinvested into funds focused on the United States, Europe, and Japan. Though the magnitude of emerging market outflows and developed market inflows during the week of January 31 was the biggest so far, it was the fifth consecutive week in which investors had fled emerging markets for the relative safety of the big developed markets. Apart from political turmoil, investors apparently were spooked by rising inflation in emerging markets. The proof? Indonesia, Brazil, India, and South Korea have all raised interest rates this year. [click to continue…]