EM Carry Trade Looks Vulnerable
John Mauldin
May 14, 2014
Last year, post-taper tantrum, the story was all collapsing BRIC walls and emerging-market doom. This year the so-called “fragile five” – Brazil, India, Indonesia, Turkey, and South Africa – the countries that were most vulnerable last year, are looking downright robust. Since their January lows, the Turkish lira has climbed 13%, the Brazilian real 10%, the South African rand 8%, and the Indonesian rupiah and Indian rupee 6% each. In the last two months, the MSCI Emerging Markets Index is up 7% in US dollar terms, a whole lot better than the 1% the developed markets have logged.
But not so fast, says Joyce Poon, Gavekal Asia Research Director (and for my money the best of the young generation of analysts working the Asia markets). “The trouble,” says Joyce, “is that this rally has been driven primarily by investors’ growing enthusiasm for carry trades in an environment of declining global volatility. Experience teaches this is an engine which can all too suddenly be thrown into reverse.”
And before we move on, I just have to share with you a marvelous bit of whimsy concocted a couple days ago by my associate Worth Wray (who always seems to be two steps ahead of the game in sensing these macro trends). As I mentioned over the weekend, you’ll be hearing from Worth every day during the conference, as he and I summarize all the goings on for you in a special Thoughts from the Frontline series. But first this:
And that is the name of that tune.
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