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Emerging markets: will they crash or not?
Passport Capital’s John Burbank is by no means a lightweight. He cut his teeth working under Julian Robertson at Tiger, his fund always performs in the top percentile, and the man actually looks like he can tear you apart with his bare hands.
He recently had an interview with the FT where he said “we are on the precipice of a liquidation in emerging markets,” alluding to the deteriorating fortunes of the region, and adding that “this feels the way that the fourth quarter of 1997 felt.”
And he’s not the only one. Burbank here sits with the majority view that emerging markets are currently on track for an epic blow up. The Brazilian real has been shorted to a whisker off its all-time low, the Malaysian ringgit is currently hovering near its Asia Crisis levels (though oil did contribute to this), emerging market ETFs have seen nothing but outflows, and the asset classes’ bonds have been treated like plague-ridden, leperous, venom-spitting bears.
His fellow fund manager Mark Dow however, would like to differ.
While in no way an emerging market bull, Dow outlined a few months back five reasons why the current situation won't translate into an epic crash (or recessions and an accompanying contagion, for that matter), namely:
Most EM’s now have flexible currencies and larger reserves – two things sorely lacking when their most harrowing crises occurred.
No more Original Sin – Original Sin, the label used for the currency mismatch when a sovereign borrows in dollars but collects in local currency, has practically been eradicated.
Deeper local markets – most EM’s now have enough asset managers, pensions, etc. to absorb any tourist selloffs.
Short dollars – in issuing debt, EM’s are now essentially short the greenback, but sans the short dollar gamma positions they had during the previous crises, making things more manageable for them.
We’ve already seen a lot of outflows
While current price action is definitely against him, Dow’s argument is actually quite compelling. The Bank of International Settlements does say that EM corporates are hoarding dollars but still, it doesn’t really negate what he’s saying either.
Something has the Fed spooked from raising rates though, and everyone seems to be pointing their fingers at the emerging markets. What do you think?
Are you on Burbank’s side? Or Dow’s?