Buy fear in emerging markets? Sure. Here’s the fear: big current account deficits are about to get a whole lot bigger as Federal Reserve tapering entices foreign money away. The eurozone periphery (ex-Italy) ran growing deficits before its crisis, and look what happened to it. But EM central banks in the worst deficit countries can do what euro members cannot: they are starting to raise rates (aggressively at times) to entice the money back. This will rebalance current accounts.
So yes – buy fear. Just don’t do it in the stock market. Currencies and rates have the best exposure to any given individual country’s self-help. But equities reap the downside of tightening – including when all tighten at once in EM: slow growth.
In the first place, fear might also have further to go in the broader sell-off of EM shares. The MSCI EM index is trading 6 per cent below its 200-day moving average. In the past two big sell-offs to strike EM assets before this one, late 2011 and early 2013, it traded as much as 14 per cent down before a rebound.