Lots of talk about Emerging Market troubles. While the troubles are real, some say Emerging markets are more resilent today than in the past. But also, there are lots of talk about developed economies problems, but like Emerging Market, develop economies are now more resilent than a few years ago.
The following is from the Telegraph (Source)
By Szu Ping Chan
4:31PM GMT 16 Feb 2014
Emerging market currency crisis not enough to ‘infect the system’, says new Pimco chief
Douglas Hodge says emerging market economies as a whole are now more resilent than they were two decades ago
Douglas Hodge, the new chief executive of the Pacific Investment Management Company (PIMCO)
The currency crisis that has engulfed some emerging market economies is not dangerous enough to “infect the system”, according to the world’s largest bond fund.
Douglas Hodge, the new chief executive of the Pacific Investment Management Company (Pimco), said while some economies had “sold their future” by shunning prudence and running big deficits, emerging market economies as a whole were now more resilent than they were two decades ago.
In his first interview since taking over from Mohamed El-Erian – who announced his shock departure in January – Mr Hodge told The Telegraph that economies which had not learned lessons from the Asian crisis in the 1990s risked falling into the same trap.
“If you go back to the Asian debt crisis in 1998, which spread on to the Latin American countries, their post-crisis policy was ‘we will not let this happen again’,” he said. “One of the tools they have used to ensure [this] is to build up massive central bank reserves. The countries that have done this – through positive trade balances and responsible fiscal policies – are sturdy. For those that sold their future, it’s coming back to get them.”
Mere talk of asset purchase tapering by the US Federal Reserve triggered a massive emerging rout that last May that has seen billions of pounds pulled out of EM stocks, amid speculation that several countries would be forced to endure currency devaluations.
However, Pimco believes the so-called “fragile five” of Brazil, India, Indonesia, South Africa, and Turkey – singled out for their reliance on foreign capital – are not “systematically important” enough to cause tremors in the rest of the world. Brazil, the largest of these economies, has amassed more than $300bn (£180bn) of foreign currency reserves. China has reserves of around $4 trillion, giving it the resource to rescue its financial system in a crisis.
“When it comes to the size of [the fragile five], their balance sheets and potential holes, they are so much smaller than what we saw, in say the tequila crisis in 1994. The emerging economy [as a whole] is much larger and much stronger at its core than it was back then.”
However, Mr Hodge also warned the “huge stock of global debt” would continue to “weigh on global growth for a long time”.
“Economic growth is on a much sturdier footing than it was in 2008, but there’s a large degree of uncertainty out there,” he said. “Part of it is driven by policy, part of it is driven by the fact that we do have this huge stock of debt – and leveraged balance sheets by their very nature are more volatile.”
While Mr Hodge does not expect a “hard landing” in China, he said failure by policymakers to tighten its grip on its shadow banking system could destabilise the world’s second largest economy.
“So far in China, they’ve come forward and taken very aggressive action [to try to curb activity] but then they step back, and the process starts again. So how aggressive will they be when they see the economy slow? If you cause credit to contract, that will impact on the economy.
“To what extent can they tighten? It’s really about regulation and whether they enforce it. These things you just don’t know, because there’s been a degree of inconsistency in terms of policy.”
Earlier this month, Bill Gross, co-founder of Pimco, branded China “the mystery meat of emerging-market countries” because of its opaque structure.
Mr Hodge also said investors should brace themselves for lower returns for the forseeable future, as the market enters a new phase – minus the support of the so-called Greenspan or Bernanke-puts that have propped up markets for the past two decades.
“There remains a large stock of debt in the global system,” he said.
“As a result, rising interest rates will serve to increase the cost of servicing that debt that will continue to weigh on global growth and limit returns across all financial assets.”
Mr Hodge insisted it was “business as usual” at Pimco, despite Mr El-Erian’s sudden departure and the subsequent management shake-up. The company, which manages almost $2 trillion in assets, has appointed six deputy chief investment officers, including Virginie Maisonneuve as equities chief.
He said Pimco would continue to extend its business beyond fixed-income, especially in “active equities”, an area he said Pimco would add “more products and more people.
“It’s more about responding to the needs of investors,” said Mr Hodge. They are and have been fundamentally changing. If we don’t adapt to external conditions then that over time will begin to erode our business.”