February 2014: The Month In Charts

Frontier stock, currency and bond markets, which were among last year’s most favored assets, are showing signs of distress as investors grow wary of developing economies. Political turmoil in Ukraine is further complicating the picture.

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High-yielding dollar bonds from Venezuela, Argentina and Ukraine, once at the core of most emerging debt portfolios, are deep in the red, leaving investors scrambling for the returns they once provided.
Dubbed the Toxic Trio by one investor, the countries have seen sharply higher political tension, falling central bank reserves and a default probability of over 50 percent in the coming five years, as priced by debt insurance markets, as noted in this Reuters article.

As of the end of February, frontier stocks were still outperforming broader emerging and developed markets, with Ukraine rallying to the top of the league table after the installation of a pro-Western interim leadership there.

But there are also noticeable laggards among the frontier economies – those which are at an earlier stage of development than established emerging markets. Nigerian stocks, a star player last year, are at the foot of the frontier league table, dropping 18 percent so far in 2014, this Reuters article points out.

Currencies are also starting to feel the strain. Many frontier currencies are pegged or managed in a narrow band and their central banks have preserved them from the worst of the emerging market storm which has hit freely-floating currencies such as the Turkish lira and the South African rand since last May.

But reserves are dwindling and exporters are looking to remain competitive. This year, frontier central banks from Ghana to Nigeria and Kazakhstan have devalued currencies, moved them out of their bands or let them fall to record lows.

In the Toxic Trio, the CDS curves are inverted or almost so, a classic sign of credit stress that signals fear of a near-term default. The Europe-Russia trade gap hasn’t narrowed appreciatively in recent years.

Frontier markets as a whole are still outpacing developed and emerging markets, but there are laggards in the frontier group.Nigerian stocks have dropped 18 percent so far in 2014. The suspension of central bank governor Lamido Sanusi has unnerved investors before elections next year.

Growth in emerging and developed economies is expected to flatten in the next few years. The sharp drop in Nigeria’s equities is apparent as developed markets have posted a steadier record. However, the BRIC economies remain at the bottom.

Priced in emerging market currencies, the price of Brent crude oil has diverged significantly from the price in U.S. dollars. Ukraine has been at the top of the chart, but ongoing political turmoil throws the country’s equity performance into question.

Emerging market currencies have been struggling over the last 12 months.Ukraine is among the countries seeing sharp declines in central bank reserves. The selloff in emerging markets is reflected in these two European indicators. Among frontier and emerging markets, more declines than advances appear in the MSCI indices for 2014, compared to 2013.

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