Emerging Markets Remain Vulnerable, As US Yields Rise

As 2014 gets underway, we once again highlight the continued vulnerability of emerging markets to rising US bond yields, a theme we have been emphasising since May 2013.

A break lower in the JP Morgan Latin America Currency Index through the key 94.00 support level, combined with a move in US 10-year Treasury yields through 3.00% for the first time since 2011, has put the focus back on potential downside in emerging market currencies. Latin FX weakness – led by the Brazilian real, which has broken through support at BRL2.38/US$ – suggests that commodity-fuelled currencies will continue to suffer in 2014.

Turkey remains our least-liked major emerging market story, with the lira pushing to a new all-time low this week, and the South African rand has tentatively broken through the critical ZAR10.5000/US$ support level.

All of these moves suggest that the dismal performance of emerging markets is set to continue in the months ahead, and if anything, we expect the biggest surprises to be to the downside, even after the declines in 2013. There may well be long-term opportunities that will emerge in some EM countries in 2014, but we remain cautious for now, and the ratio of developed market (DM) to emerging market stocks continues to point in DM's favour over a multi-year horizon.

Frontier Market Outperformance

For the record, the best performing currency against the US dollar in 2013 was… (drum roll)… the Somali shilling, which appreciated by more than 40%, presumably as post-war reconstruction accelerated and remittances increased. Meanwhile, Iranian stocks outperformed virtually all other equity markets with gains of around 135%, with the bulk of these coming after new President Hassan Rouhani initiated a rapprochement with the West in the second half of the year. However, any foreign investor dabbling in Iranian shares would have suffered from a 50% depreciation of the Iranian rial over the course of last year (although it rebounded towards the end of the year).

This Week's Trivia Question

Our previous trivia question, which appeared in our December 13 blog entry, returned to the world of film. We asked, what iconic film sequence from the late 1970s was on December 7, 2013, re-created in a major metropolis in the north-eastern USA? Hint: the main character of the film played a key role in reducing US-Soviet tensions in the mid-1980s in a sequel to the earlier film. The answer is, of course, Rocky Balboa's jog through Philadelphia in Rocky II. The clue referred to Rocky's plea for world peace to the USSR leadership at the end of Rocky IV.

This week's question is as follows: Which two religious institutions agreed on December 20, 2013, that they would compete against one another on the cricket pitch for the first time in September 2014? (Hint: the two institutions diverged in the sixteenth century.)