Why the emerging markets bet ran out of steam in 2014

It seems the emerging markets bet that paid off so handsomely in 2013 may have run its course in 2014. The Morgan Stanley composite emerging market index (MSCI EM), which captures large and mid-cap representation across 23 emerging markets (EM), sank deeper into losses.

It returned minus six per cent in 2014 compared to minus five per cent in 2013.

Closer home, the Nigeria Stock Exchange benchmark NSE-30 Share Index has returned minus 27 per cent compared to 40 per cent return in 2013. In Kenya, the benchmark NSE-20 Share Index has returned nothing, compared to a return of 19 per cent in 2013.

In Ghana, the Ghana Stock Exchange benchmark GSE Composite Index has so far returned 7.1 per cent compared to 79 per cent in 2013.

It’s a bit difficult to pluck out the exact causal factors behind stocks underperforming in 2014. Really, they should have performed better.

First, liquidity conditions were still generous in 2014; we did not see central banks across the Atlantic raising rates for quite a few months.

Second, there has been some real recovery out there. Generally, economists have underestimated just how resilient the global economy can be. The recovery has been even stronger on the emerging markets side.

But somehow, stocks just haven’t performed in 2014. Maybe this underperformance can be directly attributed to the fact that emerging markets’ central bankers have been grappling with weakening currencies, which forced them to keep benchmark rates high.

And historically, stocks and short-term interest rates don’t see eye-to-eye and have had an inverse relationship for quite a while.

Pull assets

Additionally, speculation of a possible rate rise by central bankers in Europe and the US, especially in the second half of 2014, has seen foreign investors pull their assets from EMs.

However, there have also been market specific factors. In Nigeria, it’s been declining oil prices; in fact, the plunge in global oil prices is taking a heavy toll on the country’s budget since government derives nearly all of its revenues from oil sales.

Despite rising to become Africa’s largest economy, there are growing concerns over its short-term outlook; real growth is now expected to slow by around one percentage point to around 4.5 per cent due to the indirect effect of lower oil prices.

Investors have continually priced in this when buying Nigerian assets.

In Ghana, indications of a difficult macroeconomic environment meant that investors have been keen to book profits from the 2013 rally, a move which exerted downward pressure on several sectors like consumer goods and insurance.

Consumer goods has been the worst hit sector (minus 40 per cent return in 2014) as high inflation, cedi depreciation, high fiscal deficit and an increase in utility tariffs impacted negatively on operations leading to some key players announcing lower earnings.

In Kenya, it’s been primarily driven by investor perceptions on economic prospects. If you look at the Nairobi Securities Exchange advance-decline ratio, which measures investor emotions in the stock market, it has stayed below the zero line (negative territory) since the beginning of June.

This means that investors have been bearish with their emotions for the past six months. This bearishness could stem from the fact that they do not expect the economy to perform any better in 2014.

And this has been further evidenced by reduced foreign investor activity in the market, which significantly declined to Sh8 billion compared to Sh31 billion in 2013, all on a net basis.

And as investors hold breath for a possible Santa rally in emerging markets, Merry Christmas!

Mr Bodo is an investment analyst.