An emerging emerging markets bubble?
The next global economy-wrecking bubble could come in emerging markets. I just finished reading John Cassidy’s book How Markets Fail, which is mainly about bubbles, such as the 2002-2007 mainly U.S.-based but also global credit bubble. So excuse me if all of a sudden I am looking for bubbles everywhere.
But, in truth, I had written about the glut of investment in emerging markets before, and the possibility that it is creating bubble-like conditions. So it can’t be all Cassidy-inspired paranoia.
But, a global investment bubble, focused in countries that only ten or twenty years ago were still considered economically irrelevant?
One of Cassidy’s points in his analysis of the U.S. real estate bubble is that the true believers in unstoppable home prices always said that the U.S. housing market had never declined on a national level, and that any drop offs in home prices had been regional, isolated to certain U.S. areas that for one reason or another had seen peak-and-valley dynamics. No one wanted to believe this could happen countrywide. It did, of course, after hundreds of thousands of subprime mortgages were written.
This leads me to wonder if there’s an analogy on offer here. Everyone knows there are risks in emerging markets (even the big ones, China, India, Brazil, Russia), especially political risks. But I wonder if there is enough thought given to the global risks being created by all the money pouring into emerging markets, independent of country or region-specific risks. In other words, are the value of emerging market-based investments being pumped up beyond reason everywhere, because of the enthusiasm for the potential upside in these places?
I’m no economic expert. But others, including “Dr. Doom,” have made a similar point (the following is from a May Bloomberg story):
Nouriel Roubini, the New York University professor who predicted the global financial crisis, said the Brazilian, Chinese and Indian economies may be overheating and developing asset bubbles.
The outlook for Brazil’s economy is “very positive,” though the crisis in the euro zone countries and a slow “u- shaped” recovery globally could dent the country’s growth, Roubini said today at an event in Sao Paulo.
“In Brazil, like in many other emerging market economies, there is now evidence of overheating of the economy,” Roubini said.
And there’s data already out there showing that the money flowing out of stocks in Europe and the United States is being pumped into emerging markets, according to the Financial Times today (one of the ramifications of this is that the value of emerging market currencies is being pumped up):
Investors are piling into emerging market equities even as they are pulling out of stocks in the sluggish developed world. According to EPFR, equity funds saw a net outflow of $3.16bn globally in the week to July 21 but emerging market equity funds posted a $1.5bn inflow.
Of course, here are plenty of reasons to believe that emerging markets merit all the investment and attention they have received.
Countries like China, India, and Brazil (not to mention Mexico, Chile, Indonesia, Russia, etc.) all are seeing strong growth in their middle classes, big expansions in their consumer bases, and increasingly stable government policies, etc. Many of these countries are rich in the commodities that the developed world still needs, and that emerging giants like China are themselves devouring.
But that doesn’t rule out a bubble forming. Bubbles begin on solid ground, but then standards, oversight and judgment fail as the herd-mind takes over.
Finally, perhaps it is my Americas-centric experience and P.O.V. but it does strike me as a bit suspicious when rumors start to fly of Brazilian companies listing on the Hong Kong stock exchange. My sense is that the listing of Brazilian shares in Hong Kong seems to present a case of investors being chased in a cash-rich place where the information regarding the stocks and underlying companies will be harder to come by.
And in the history of bubbles (like the Latin America debt bubble of the 1980s, or Argentina’s debt bubble in 2001), these sorts of triangulations, and the role of “third country” investors, is well-documented. Also from Bloomberg:
Hong Kong Exchanges & Clearing Ltd. is currently in talks with more than one Brazilian company over potential listing, according Lawrence Fok, the bourse’s chief marketing officer.
“There is a natural resources company from Brazil which may be interested in doing a secondary listing in Hong Kong,” Fok said at a meeting in Tokyo, citing Hong Kong Exchanges’ Chairman Ronald Arculli …
The operator of Asia’s third-biggest stock market has held talks with Brazil’s bourse over potential listing of Brazilian companies in Hong Kong and Hong Kong companies in the South American country, Arculli said on June 22. The Hong Kong Exchange is aiming to attract new international listings, particularly in the metals, mining and energy industries, according to the exchange’s 2010 to 2012 strategic plan.
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- Brazil, India, China May Be Overheating, Roubini Says (Update2) (businessweek.com)