Emerging-Market Selloff 'Overdone'

UBS CEO sees investors exiting EM assets faster than environment justifies, emphasizes importance of country-specific decision-making.

The selloff in emerging-market (EM) assets that sent the benchmark equity index to the lowest valuation since the 2008 financial crisis may have gone too far, according to UBS AG Chief Executive Officer Sergio Ermotti.

“What we are seeing right now is a lot of money exiting the emerging markets,” Ermotti, the head of Switzerland’s biggest bank, said in Zurich on Bloomberg Television’s “Countdown.” “Short term, it looks a little bit overdone.”

Global investors pulled $6.3 billion from developing-nation equities in the week through Jan. 29, the biggest outflow since August 2011, according to Barclays Plc, citing data from EPFR Global. The retreat dragged down the MSCI Emerging Markets Index’s valuation to 11 times reported earnings, a 40 percent discount versus the MSCI World Index, the widest gap since October 2008, data compiled by Bloomberg show.020414_Bloomberg_PQ1

Emerging-market stocks and bonds are tumbling as China’s economy slows, weak currencies from Turkey to South Africa spur central banks to raise interest rates, and the U.S. Federal Reserve pushes ahead with plans to reduce monetary stimulus. The MSCI developing-nation gauge has dropped 8.7 percent this year, extending its worst start since 2009, while a JPMorgan Chase & Co. gauge of local-currency debt has lost 0.9 percent.

The emerging-market stocks measure dropped 1.2 percent to 915.38 at 9:50 a.m. in London, heading for the lowest close since August, while the MSCI World gauge of developed-nation shares fell 0.6 percent. Global equities have lost about $2.9 trillion of market value this year as the selloff spread from emerging markets to Japan, the U.S., and Europe.

 

Currencies Rally

Emerging-market currencies rebounded today, with South Africa’s rand gaining 1.2 percent against the dollar and Turkey’s lira strengthening 1.1 percent. Both currencies have weakened more than 5 percent versus the greenback this year.

“Like we saw in the last few years, when there are excesses in terms of expectations about one asset class or the other and things move in the wrong direction, you have very violent moves on the other side,” said Ermotti, whose bank reported fourth-quarter profit that beat analysts’ estimates today.

Some strategists see further losses for emerging markets. Inflation-adjusted interest rates are still too low in developing nations for Citigroup Inc. and Goldman Sachs Group Inc. to foresee an end to the retreat in currencies.

One-year borrowing costs in Turkey are about 3.3 percent, less than half of the average in the three years before the 2008 global financial crisis, even after the central bank doubled its benchmark rate last week, according to data compiled by Bloomberg.

Ermotti said it’s important to differentiate between developing nations when making investment decisions.

“Clearly, not all emerging markets have the same kind of prospects going forward,” he said. “So we have to pay attention about the underlying dynamics of each economy before making final judgments on how we invest our clients’ money.”

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