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Charles Sizemore
Charles Sizemore
Articles (507)  | Author's Website |

Is the Fed’s Tapering Hurting Emerging Markets?

January 30, 2014 | About:

I spoke to Varney & Company’s Charles Payne this morning about the emerging market selloff and what is driving it.

At its heart?

Current account deficits. Turkey, South Africa, Argentina and Brazil—the countries that have been in the headlines the most of late—all have large current account deficits. Part of this is due to slowing commodity exports to a slowing China, but the strength of the local consumer economy—particularly in Turkey and South Africa—is a factor as well.

All else equal, a country that persistently imports more than it exports will see its currency weaken. Of course, all else is rarely equal, and large capital inflows in the form of direct investment and portfolio investment can cause a country’s currency to remain strong even in the face of persistent deficits. This was certainly the case for the United States during the “strong dollar” days of the late 1990s.

It was just a few years ago that emerging market finance ministers fretted that too much capital was flowing their way and causing currency values to rise to the point of choking off economic activity. Annoyed by the rapid appreciation of the real, Brazilian finance minister Guido Mantega declared that he was fighting a “currency war” to keep the real competitive, and that he had no intentions of losing.

Ah, those were the days.

It is important to realize that, while emerging currencies can always go lower, this is not 1997. We are not on the verge of a major emerging market crisis, unless something radically changes from today’s status quo. Unlink in 1997, most of the countries seeing their currencies come under pressure are on floating exchange rate regimes and, frankly, a little depreciation is not entirely a bad thing if it boosts exports and closes the current account deficit. In the meantime, we’re getting some fantastic bargains in many emerging stock markets.

Google Sells Its Handset Business

I also spoke with Mr. Payne about Google’s (GOOG) selling its handset business to Lenovo.

Leave it to Google to keep us all guessing. When Google first bought Motorola Mobility in 2011, we all assumed it was a “land grab” for the company’s patents. Google was getting sued on multiple fronts for alleged patent infringement related to its Android operating system.

We all expected Google to keep the patents…and dump the hardware business. Yet Google surprised us all by making a go at it as a manufacturer.

In the final analysis, was it a bad move for Google? Not really. After various assets were stripped and sold off, Google ended up paying about $4 billion for the patent portfolio. Given Google’s cash hoard, that is pocket change, and we may never know the extent to which Android needed those patents to avoid punitive lawsuits.

Going forward, Google will have a cleaner balance sheet without the hardware business, and selling to Lenovo makes good business sense. Lenovo has a great presence in emerging markets, and it helps reduce Google’s dependency on Samsung.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the chief investment officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, quoted in Barron’s Magazine and the Wall Street Journal, and published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures and Options Magazine, and The Daily Reckoning.

Visit Charles Sizemore's Website

Rating: 1.7/5 (3 votes)


AlbertaSunwapta - 3 years ago    Report SPAM

Back in the fall I raised the following questions as part of my concern about North American market values being risky and that, as everyone knows, interest rates and exchange rates are interrelated.  ZIRP doesn't exist in a vacuum.  Competing countries drop their currencies to capture market share and thus it could finally impact on North America's historically high, to date non-mean reverting profit margins.  Right now though it seems the currencies are dropping despite EM market support actions.  As such tapering may have unclear and quite un-intended consequences.  To me that means pronouncements of fair market valuations don't preclude the possibility that fair values can't become great values.


"...there's ZIRP and there's FX. As in the 1930s I'd say there's a higher risk of competitive exchange rate devaluations occurring in some unexpected way that may blindside Fed policies. Also, when the Fed. Reserve stops buying, who will replace it in the market? Would yields move up in its absence? Going forward any interest rate normalization, in a non-deflationary environment, will probably mean companies then needing financing will see their profit margins squeezed as their costs rise. The window of opportunity in insanely low cost financing may be closing."



Today in the WSJ ...

"The situation is very different form the 1997 Asian crisis, when developing countries’ currency reserves were far lower and their exchange rates were pegged at unsustainably high levels. Nonetheless, the history of those tumultuous events provides a valuable reminder of how quickly these seemingly distant places’ problems can spread into U.S. and European markets."

The Fed Erred in Ignoring Emerging Markets - MoneyBeat - WSJ


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