Just last month when we released the Global Asset and Auto Finance Survey for the fourth quarter of 2013 the outlook for the global markets was becomingly increasingly positive – with emerging markets continuing to perform, and markets like the US and UK showing strong signs of recovery. Recent news from the emerging markets have however undoubtedly taken some of the gloss off expectations, and this news could be bad for the asset and auto finance industry, which counts these countries as among the best providers of opportunity for the near future.
 
The ‘Fragile Five’ – India, Indonesia, Brazil, Turkey and South Africa – and other emerging economies like Russia, Argentina, Chile and Colombia, have all posted declines, with Emerging Market (EM) equity indices recording a 6.4% loss in January 2014, according to Dow Jones. Their currencies have taken a battering in recent months as capital has taken flight following the US Federal Reserve’s announced intention to taper the Fed’s quantitative easing program, however modestly and slowly, and in the future.
 
The Turkish lira plunged to a record low against the dollar, triggering emergency defensive action from the central bank to raise interest rates; similar action was taken in India and South Africa. Any damage limitation here is expected to be short-lived.
 
These economies have witnessed spectacular capital inflows chasing yield since the global financial crisis, and therefore could suffer considerable economic pain should the situation reverse. And that becomes increasingly likely against a backdrop of gradually rising global interest rates in the developed economies, particularly as the US economy strengthens and growth in China slows. The current account deficits of the ‘Fragile Five’ have left them particularly vulnerable to capital outflows. With diminishing returns from often politically and economically unstable markets, it’s no shock that capital is flowing back to safer havens that are showing encouraging signs of growth.
 
But while there are doomsters predicting an emerging markets crisis sooner rather than later, like that of 1997–98 when investors fled all EM asset classes, there are plenty who see the current situation as no more than a temporary drama. The International Monetary Fund, for example, argues that the emerging markets are far less economically vulnerable than they were in 1997, with flexible exchange rates and higher reserves - and that they can adjust to a world in which rates gradually climb.
 
Famed economist Nouriel Roubini believes that the threat of a full-fledged currency, sovereign debt and banking crisis remains low for these countries – this from the man known as ‘Dr Doom’. And Mark Mobius, chairman of the massive Templeton Emerging Markets fund, believes that the effect of the US tapering is “not significant” to emerging markets as an asset class. Emerging markets globally face some falling growth, rising debt, and political uncertainty, and are surely in for a bumpy ride in the near term. But as they continue to develop overall in the slightly longer term, the opportunities for asset finance remain firm.
 
For the present at least, White Clarke are seeing little evidence of these fluctuations affecting volumes in many of the markets in which they are operating, and instead are seeing clients in some countries (China, for example) posting record volumes of business – great news, as they celebrate their New Year.
 
To download the White Clarke Group industry outlook, click here.