Back in May 2013, then US Federal Reserve chairman Ben Bernanke announced that the Fed was looking at the possibility of winding down its quantitative easing programme.
The precipitous sell-off in equity markets across the world which followed has come to be known as the ‘taper tantrum’.
But while developed market equities were hit hard, Asian and emerging market equities and bonds suffered far worse. The MSCI Emerging Markets index fell by 15.5 per cent between May 21 2013 and June 25 2013. Emerging market bonds did not fare much better.
The reason was that investors viewed that Asian and emerging markets had benefitted even more than developed markets from QE and other loose monetary policies from the US and the UK. The withdrawal of these policies was seen as a huge negative for these markets.
Ayesha Akbar, portfolio manager on the Fidelity Solutions fund of funds team, explains: “Emerging markets have been big beneficiaries of low rates in developed markets, as investors move further up the risk spectrum in search of yield. This led to large capital flows into many developing countries.”
With both the US and the UK set to raise their base interest rate in 2015, the question on investors’ lips is whether this monetary tightening will have the same sort of effect as the ‘taper tantrum’.
Another tantrum?
In the past month, equity markets have sold off sharply, with Asian and emerging markets suffering the worst. Some commentators have pointed the finger to investors focusing on a rise in US rates.
Ms Akbar says that the recent sell-off “may have been triggered by statements from the Fed that indicated they could hike rates by the middle of next year”, and the poor performance in emerging markets has “raised fears of a repeat of last year’s ‘taper tantrum’”.
In a recent paper on the state of the Indian markets following the election of prime minister Narendra Modi, BlackRock’s Ewen Cameron Watt, chief investment strategist of the BlackRock Investment Institute, cited persistent risks, including another “bloodbath” sell-off across the region.
“Risks remain and include a re-run of the 2013 bloodbath in emerging markets in anticipation (or fear) of a US rate rise because, while India is in better shape these days, the country is still dependent on external funding.”
But while commentators are warning of the risks of a US rate rise, such an event has been anticipated by the markets for several months and believers in the efficient markets theory would assume that it has been incorporated into the price of markets by now.
Emerging market equities are certainly at a cheaper level overall than developed market equities. The MSCI Emerging Markets index has a current forward price-to-earnings ratio (p/e) of 10.9x, while the S&P 500 has a forward p/e of 16.4x.
Such a disparity in p/e ratios has come about thanks to a significant divergence in performance between Eastern and Western markets in the past few years, which has led Asian equities to now look cheap on a relative basis.
