Some EM currencies have stabilized today, with ZAR, BRL, and MXN all flat on the day vs. USD after earlier losses. Worst EM performers over the last two days are HUF (-3.5% vs. USD) PLN (-3%), TRY (-3%), CZK (-2%), and ZAR (-2%). Compare this to the worst-performing majors over the same period, which are NZD (-4%), AUD (-3%), CAD (-3%), NOK (-2.5%), and SEK (-2%). EM has arguably held up better than G10 from the Dubai fallout. To us, this tells us that while EM remains vulnerable to profit-taking, strong EM fundamentals should prevent the sort of disruptive contagion we’ve seen in the past. And, we note that the Dubai restructuring is likely to hurt the developed countries, not EM, as BIS data shows heavy bank exposure on the part of the UK and Europe. With the exception of some of the Gulf states, it appears that EM lenders simply haven’t taken on big exposure to Dubai. Still, these Dubai developments along with recent rumblings of trouble in Greece serve as a reminder that while global conditions are improving, there remain pockets of stress. Certainly, Brazil, Poland, Korea, and most EM credits are getting stronger and have a very good 2010 outlook. However, countries in Eastern Europe still worry us, such as the Baltics, Hungary and Ukraine, and we would continue to be selective with regards to EM investing. We have stressed time and again that conditions are moving away from investors simply piling into all risk assets in liquidity-driven trades and towards investors becoming much more selective in fundamentally-driven trades. This will require more homework on the part of global investors, but we believe profitable opportunities in EM investing still exist.
| Dubai Bubble | 11/27/2009 10:21 AM EST
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More thoughts on Dubai World. We stress again that the current troubles being seen in Dubai are a direct result of its efforts to tie its fortunes to global real estate, tourism and services, and are particularly unique to Dubai and should not have wider implications for sovereign EM risk. The property boom helped this strategy work in the good times, but the popping of the global real estate market has put severe strains on Dubai.Developments in Dubai should thus be seen in the context of the entire country basically being geared toward real estate development and not in the context of EM sovereign risk and fundamentals. Thus, while the current period of risk-off trading could yet persist, longer-term investors should be looking for buying opportunities in EM during this correction. Dubai's economy used to be heavily dependent on the oil industry, but its oil reserves have diminished significantly and are expected to be exhausted in 20 years. That is the reason behind the shift in the economy away from oil and energy and toward real estate and construction, trade and entrepot services, and financial services (11%). What is making things so difficult for Dubai World is not just that the domestic real estate market has collapsed. Rather, it's the fact that there is no safe haven for the company. Its operations are worldwide (which should imply some sort of geographical diversification) but they are concentrated in property and real estate development. Every country is undergoing a painful recession and/or deep correction in the property market, so Dubai World is simply getting squeezed in all of its investments. The fact that it is a quasi-sovereign muddies up the water a bit, but we stress again that Dubai's woes should not reflect badly on most other EM credits, which we believe remain sound and on an improving path. Position: None |
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