While HSBC itself may be having some rather substantial capital outflow issues, that does not prevent its head of EM research, Pablo Goldberg, to list four reasons why the current series of “painful though unrelated flare-ups” in key markets may last. To wit:
1) Reinforcement of preference for DM vs EM
– While EM have cheapened vs DM, value might not be enough as long as the flow continues to favor DM
2) Potential short-term solutions leading to longer-term problems
3) FX depreciation leading to outflows from local markets
4) Due to decentralized nature of these shocks, no silver bullet can restore appetite for risk
Of course, he saved the best for last: “Unlike the market shocks of recent years, QE or IMF bailouts unlikely to come to rescue this time.” Which really is all that matters in a time when the Fed has begun tapering and any market not economy data-driven untapering, will merely serve to kill its credibility that much faster.1
Finally, in order to assess EM demand, Goldberg recommends tracking 1Y/1Y swaps, China PMIs and EPFR flows data to see when/if the capital outflow trend will reverse.