From a performance perspective, the interesting development was in the US. US equities rallied almost 30% in 2013 even as the US 10-Year Treasury yield went from less than 1.7% at the end of April 2013 to a new range, 2.7% to 3.0%, a full 100 basis points higher than before the “Taper Talk”. The ability of US equities in 2013 effectively to ignore the coming policy change at the Fed to taper QE while US bonds were selling-off aggressively strongly suggests to us that QE was not responsible for the emerging market contagion.
The relative equity out-performance of the US was a two-way street and had at least a part of its roots in the deceleration of economic growth in many emerging market countries. For example, economic growth in the four largest emerging market countries of Brazil, Russia, India, and China has been slowing with weighted average real GDP growth of 8.2% in 2010 declining to an estimated 5.5% in 2013 and a forecasted 5.1% for 2014. (See “Decelerating BRICs Face Structural Challenges”, by Samantha Azzarello, December 9th 2013, http://www.cmegroup.com/education/featured-reports/decelerating-brics-face-structural-challenges.html). The growth slowdown was accompanies by equity declines in many countries, with the MSCI Emerging Market Index losing 5% of its value over 2013.
The juxtaposition of a powerful rally in US equities set against decelerating economic growth and rising political risks in many emerging market countries, we would argue, provided the foundation and incentives for many global asset allocators, such as pensions, endowments, sovereign wealth funds, etc., to shift their asset allocation policies in the direction of US equities and other mature industrial markets, and away from emerging market countries. This asset allocation shift hit both emerging market equities and currencies. We are definitely not in the camp that thinks the Fed’s QE tapering debate and decision was a primary cause of the contagion.
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This article was written by CME Group Managing Director and Chief Economist Bluford Putnam.
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