Comment: The emerging market jitters pose dilemma

Martin Flanagan
Martin Flanagan
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Developing nations are suffering the fall-out from changes in the West, writes Martin Flanagan

EMERGING market volatility is unlikely to go away soon, given the macro-economic factors, which will pose a dilemma for investors in financial markets as 2014 unfolds.

Western markets, including the UK and Wall Street in particular, did well last year out of returning confidence to their economies and a more positive economic backdrop that even included the less storm-tossed parts of the eurozone.

But one of the adverse knock-on effects is that money invested in the likes of Russia, China, Turkey, Argentina, Thailand, Nigeria etc is being repatriated to developed countries – further undermining confidence in those emerging markets that have been the get-out-of-jail-free card for western companies for the past decade.

As a result, jitters about lesser developed countries have somehow seemed to undermine the natural order of things – evoking uncomfortable echoes of the Asian financial turmoil and Russian debt default of the late 1990s.

Drinks, consumer and luxury goods giants such as Diageo, Pernod Ricard, Remy-­Cointreau, Unilever and Burberry have all recently had to admit the froth has come off their performances in those markets.

The US Federal Reserve’s scaling back of its bond-­buying programme continues, and a strengthening recovery in the UK indicates the Bank of England might begin a similar tapering of its own quantitative easing programme – both factors that could drive western asset prices up and speed the flight of capital from emerging markets.

The Russian rouble hit record lows late last week, while South Africa’s rand and the Hungarian forint currency both touched seldom-seen troughs.

The Indian central bank has even accused western countries of operating self-serving economic policies.

The accusation has been made that the strength of lesser developed countries helped the West out of its 2008 financial crisis and there should now be some understanding and reciprocation.

But even with these new, significant headwinds it is still not a clear-cut decision for investors to bet on a western recovery instead.

About 70 per cent of sales of UK FTSE 250 listed companies are overseas, and even though the eurozone is the biggest export market, the emerging markets account for a significant swathe of that turnover. Our companies’ health depends on recovery from Asia to Latin America.

And, as Diageo boss Ivan Menezes pointed out recently, the reduced growth rates in emerging markets are still comfortably ahead of GDP in a recovering western hemisphere.

In short, the economic and political problems in lesser developed countries are clearly more than a short-term blip, having gone on for well over a year now.

But it is impossible to know how tenacious those economic headwinds will be – and when normal service resumes of a burgeoning, aspirational middle class in those markets devouring western products from whisky to fashion, engineering and detergent.

Google searches for an explanation

Not brilliant timing from Google, as the ubiquitous United States-based search engine has just revealed that its UK revenues rose 15 per cent to £3.6 billion last year.

This is the Google UK which last year paid the Treasury just £11.2 million in corporation tax, much to the voluble chagrin of Margaret Hodge MP of the public accounts select committee.