Comment: Investors run as emerging markets falter

Terry Murden. Picture: Ian Georgeson
Terry Murden. Picture: Ian Georgeson
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GLOBAL stock markets are likely to open nervously this week as traders assess the damage of political mismanagement and over-optimistic growth forecasts in emerging markets that prompted Friday’s sell-off.

It has long been a given that the developing nations are the place for investors to pour in capital. Well, the chickens may now be coming home to roost as prospects are revisited and the realities of political uncertainty kick in.

On Friday the FTSE 100 fell 109.5 points, its biggest single-session fall this year, while the FTSE Eurofirst 300 index – a measure of the biggest companies in Europe by market capitalisation – had not fallen so much in one day since June.

Aberdeen Asset Management was the worst hit of the British stocks because of its exposure to these territories. Aberdeen has attempted to diversify its portfolio by acquiring Scottish Widows Investment Partnership, but emerging markets will still account for 57 per cent of its sales.

Analysts have been expecting a general shift of funds out of these regions and back into developed economies, a transition likely to accelerate as the recovery in the established western nations takes hold. According to the most recent data, investors have been pulling funds from emerging stock markets this year with the United States, Japan and the gold market among the beneficiaries.

The domino effect across global markets on Friday suggests a common factor but in fact the causes of Friday’s rout were varied. The trigger point was Argentina where the government gave up its battle against the peso’s decline. Strict foreign exchange controls were relaxed amid claims of political incompetence and fears of a return to hyper-inflation.

Brazil and South Africa are worried by a slowdown in China, which is a big importer of raw materials from both nations. Russia is being impacted for similar reasons, while Turkey and India – two of the nations expected to show significant growth – are concerned that the withdrawal of the US stimulus under Federal Reserve chairman-designate Janet Yellen may add to any slowdown in funds to finance their expansion as investors return to the US.

The direction of markets will also be dictated by the relationship these developing nations have with western economies and their ability to remain competitive. “Reshoring” of work from Asia and other low-cost regions to Britain is now being promoted by Prime Minister David Cameron.

The prospect of a currency crisis may have spooked the markets, though it would be premature to think that expansion in emerging markets will be brought to a sudden halt. They are not called emerging markets for nothing and prospects remain positive, if not quite so bullish as previously thought.

Evidence from Turkey and India alone suggests they are on a long road to transforming their economies while China is still described in emerging market terms even though it challenges the US as the world’s biggest economy. Furthermore, as explained above, China’s power, size and influence is now such that its development has a direct bearing not only on other emerging markets but on the developed economies too.

Levene should point finger of blame at Lloyds board

IT WAS inevitable that Lord Levene would waste no time giving the government a kicking last week over the botched bidding process for Lloyds Bank’s forced sale of assets.

Levene’s NBNK Investments lost out to the Co-operative Group in trying to buy 632 branches and the Cheltenham & Gloucester mortgage business, and it is fair to say that even at the time there were a few raised eyebrows at the decision. We all know what happened next.

The withdrawal of the Co-op was one of the more embarrassing moments in the aftermath of the banking crisis, more so than Santander’s decision to pull out of buying branches from Royal Bank of Scotland. The Spaniards claimed RBS’s IT system was dodgy – and they weren’t wrong.

Levene (left) was quizzed by members of the Treasury Select Committee over the so-called Project Verde sale of the Lloyds businesses and he made it clear that in his view the whole exercise was rigged in favour of the government’s preference to introduce mutuality to the banking sector. The emergence of the Co-op’s financial woes and inability to complete the deal undermined that argument.

According to Levene, Lloyds chairman Sir Win Bischoff insisted there were no external pressures on the board. But if that was the case then it would switch the blame for selecting the Co-op away from the Treasury to Lloyds itself.

After removing the old board for its disastrous takeover of HBOS, the new one therefore came close to another cock-up over the sale of its assets to the Co-op. No Lloyds director received even a slapped wrist. Meanwhile, Bischoff, who is retiring from Lloyds, was last week appointed chairman of the Financial Reporting Council which has joined the investigation into the collapse of the Co-op Bank. «

Twitter: @TerryMurden1