“Red alert” concerns surrounding major emerging market sell-off

As emerging markets continue to rally, a number of analysts have already begun to question whether they may have reached their peak.

The weight of money pouring into emerging markets has been intense, said Morgan Stanley equity strategist Jonathan Garner speaking to Australia’s Financial Review.

“Since late 2016, investors around the world have sunk $US100 billion into EM share funds, according to EPFR Global, which tracks such things,” he said.

“They crammed in $US7.9 billion in a single week in late January, making it the largest weekly inflow of all time.”

Garner cautioned that these inflows are a strong contrarian indicator and should put you on an “amber alert” for a sell-off and a correction.

He further warned that it wasn’t just the inflows data that concerned him, but that prices have moved so quickly that they have blown past his year-end targets – which escalates that “amber alert” to a “red alert”.

“We think that as the year goes on, the earnings cycle will be rolling over, and when it rolls over that is typically bad for share prices,” he said.

He believes this correction will happen by the northern hemisphere summer (South Africa’s winter) “at the latest, and probably before”.


Garner’s concerns have been echoed by a number of financial analysts speaking to Bloomberg, who said that it may be time for a pause amid the euphoria across emerging markets.

One such is Finisterre Capital, whose $700 million Emerging Market Total Return Strategy funds investing in fixed-income securities returned 11% and 12% in 2016 and 2017, respectively. CIO Damien Buchet said that the scope to advance further this year is limited as growth in developing economies has reached a mature phase.

“It’s quite striking everyone becomes so positive after we have rallied so much,” said Buchet.

“We’re in a less positive part of the cycle than we were two years ago, which doesn’t mean that the next stage is a market crisis but a repricing is probably more accurate.”

The rand is currently on the back of its best three-month run in almost 10 years as it rides a wave of optimism following Deputy President Cyril Ramaphosa’s election as the leader of the ruling African National Congress.

The 19% gain in the period ended 31 January is more than double that of the next-best emerging-market currency – Poland’s zloty.

At 10:50 SAST on Friday, the rand was trading at R11.99 to the dollar, R17.04 to the pound and R14.97 to the euro.

With reporting from Bloomberg.

Read: The rand last looked this good 10 years ago

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“Red alert” concerns surrounding major emerging market sell-off