Although I live in an “emerging market”, I am probably one of the least qualified to comment on recent events.
I don’t trade the Rand (or Turkish Lira), nor do I buy any stocks or indices on any emerging market platforms, including the ALSI.
You could say, I’m a pure analyst here, with no “skin in the game”, i.e., I have no money where my mouth is, and therefore you shouldn’t listen to anything I have to say about it (I have just given away my thoughts on “market analysts”).
However, I live here. I buy stuff in Rands. When the ALSI tanks, I will feel it indirectly. So maybe I have more skin in the game now then when I trade the AUDNZD, two countries I have never even visited?
The Lira is doing what the Rand did not too long ago
This Lira weekly chart clearly shows the parabolic move. If you’re in Turkey, you’re probably thinking what we were thinking in 2015:
This is the Rand’s previous attempt at scaring us all silly. I vividly remember sitting at my trading desk and thinking that it’s all over. The Rand was going to trade at 20 to the USD, and it was game over. As I write this, of course, the Rand is taking another beating, and I do think the long-term picture sees USDZAR trading at and beyond 20, but let’s move on.
The point I mean to raise here is that these parabolic moves typically don’t last. I knew that in my head in 2015 and I knew that the right trading strategy was to short the USDZAR (and I would have been right), but could I short it? No. I bet much of Turkey has the same problem right now. It’s tough to follow a trading plan in the face of a wall of uncertainty, fear and despair.
I’m not an economist
What separates the South African move in 2015 and the Turkish situation right now from other parabolic curves that just got worse and worse? In my opinion, it is inflation.
I do not doubt that Turkish inflation is well above the last reading of 16% in July. However, inflation of 16% doesn’t imply that there is no fixing the situation, especially in an emerging market.
Here is South Africa’s projected inflation:
Here is Venezuela:
These are official stats from the Banco Central De Venezuela, so they are nonsense. The situation is far worse.
Zimbabwe’s peak month of inflation was estimated at 79.6 billion percent in mid-November 2008. That number is so big; it’s incomprehensible and ridiculous even to measure. It was the end of the Zimbabwe Dollar. The Venezuelan Bolívar is also as good as dead. The only people who disagree with me work at the Banco Central De Venezuela, and no doubt have very important titles to their names.
So, where does that leave South Africa and Turkey and other emerging markets? Honestly, I don’t know. As I said, I am no economist (I trade, I have skin in the game). However, it appears to this trader that parabolic collapses in one’s currency, coupled with hyper-inflation do indeed spell the end. South Africa and Turkey don’t seem to be there (yet?).
Parabolic moves happen in all markets, all the time. Here is a monthly Amazon chart for your kind perusal:
No points for identifying the parabolic (unsustainable) move here. Also, note that this trader isn’t shorting it either.
One more point on emerging markets
Why do international investors move their money out of “stable”, established markets and into emerging markets? I’m talking stocks and indices now, like the South African ALSI.
There are two main reasons:
- They expect a better return
- They want to diversify
However, do they achieve these things?
Well, let’s have a look at what Gary Antonacci explored in Dual Momentum Investing.
“Due to increased globalization, correlations are higher now among emerging markets, as well as between emerging and developed markets. [The figure below] shows the five-year rolling monthly correlations between emerging and developed markets. It was below 0.30 in the 1990s. However, for the past three years the correlation has remained steady at over 0.90.”
What is Mr Antonacci saying? He is proving that emerging markets mostly copy what the bigger markets are doing.
Therefore, investors are unlikely to see returns that match the risk they are taking, and they aren’t diversified.
I think investors are catching onto this fact. Money-managers have known it for some time, yet they continue to punt investing in emerging markets as a valid strategy for diversification. Why?
I don’t believe the motive is sinister, but rather a form of action-bias, i.e., the need money-managers have to “do something”.
From Daniel Crosby’s The Laws of Wealth, “A group of researchers examined the behavior of soccer goalies when faced with stopping a penalty kick. By examining 311 kicks, they found that goalies dove dramatically to the right or left side of the goal 94% of the time. The kicks themselves, however, were divided roughly equally, with a third going left, a third right and a third near the middle. This being the case, they found that goalies that stayed in the center of the goal had a 60% chance of stopping the ball; far greater than the odds of going left or right. So why is it that goalies are given to dramatics when relative laziness is the most sound strategy? The answer becomes more apparent when we put ourselves into the mind of the goalie (especially those who live in countries where failure on the pitch is punishable by death). When the game and national integrity are on the line, you want to look as though you are giving a heroic effort, probabilities be damned! You want to give your all, to “leave it all on the field” in sportspeak, and staying centered has the decided visual impact of stunned complacency.”
Now that the supposed rewards of investing in emerging markets aren’t there (but the risks remain), what might we expect investors to do?