Opinion and Analysis
By GEORGE BODO
It seems the emerging markets bet that paid off so
handsomely in 2013 may have run its course in 2014. The Morgan Stanley
composite emerging market index (MSCI EM), which captures large and
mid-cap representation across 23 emerging markets (EM), sank deeper into
losses.
It returned minus six per cent in 2014 compared to minus five per cent in 2013.
Closer home, the Nigeria Stock Exchange benchmark
NSE-30 Share Index has returned minus 27 per cent compared to 40 per
cent return in 2013. In Kenya, the benchmark NSE-20 Share Index has
returned nothing, compared to a return of 19 per cent in 2013.
In Ghana, the Ghana Stock Exchange benchmark GSE
Composite Index has so far returned 7.1 per cent compared to 79 per cent
in 2013.
It’s a bit difficult to pluck out the exact causal
factors behind stocks underperforming in 2014. Really, they should have
performed better.
First, liquidity conditions were still generous in
2014; we did not see central banks across the Atlantic raising rates for
quite a few months.
Second, there has been some real recovery out
there. Generally, economists have underestimated just how resilient the
global economy can be. The recovery has been even stronger on the
emerging markets side.
But somehow, stocks just haven’t performed in 2014.
Maybe this underperformance can be directly attributed to the fact that
emerging markets’ central bankers have been grappling with weakening
currencies, which forced them to keep benchmark rates high.
And historically, stocks and short-term interest
rates don’t see eye-to-eye and have had an inverse relationship for
quite a while.
Pull assets
Additionally, speculation of a possible rate rise
by central bankers in Europe and the US, especially in the second half
of 2014, has seen foreign investors pull their assets from EMs.
However, there have also been market specific
factors. In Nigeria, it’s been declining oil prices; in fact, the plunge
in global oil prices is taking a heavy toll on the country’s budget
since government derives nearly all of its revenues from oil sales.
Despite rising to become Africa’s largest economy,
there are growing concerns over its short-term outlook; real growth is
now expected to slow by around one percentage point to around 4.5 per
cent due to the indirect effect of lower oil prices.
Investors have continually priced in this when buying Nigerian assets.
In Ghana, indications of a difficult macroeconomic
environment meant that investors have been keen to book profits from the
2013 rally, a move which exerted downward pressure on several sectors
like consumer goods and insurance.
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