Brokerages fear EMs will face brunt of QE taper

The US jobs data over the weekend has reinforced market fears that the Fed's QE will taper sooner rather than later. Global brokerages say emerging markets (EMs) will face the brunt of the realignment, report CNBC-TV18’s Nimesh Shah and Ashmit Kumar.

US Federal Reserve chaiman Ben Bernanke sent global financial markets into a tizzy when he indicated that he may taper his stimulus package as growth improves. Now, with last week's strong US non-farm payroll data giving just that indication, the buzz is that this tapering could begin within a few months, maybe even as early as September, if economic trends hold.

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This has worried global investors, especially those with a large emerging market exposure. Many have even started questioning the longevity of global emerging markets as an asset class, especially since these markets have been struggling with slowing growth prospects.

Currency weakness has added to these concerns and this weakness has worsened as tapering fears push investors to withdraw from emerging market equities and bonds and shore up dollar positions.

So far this year, the MSCI World Index has risen 8 percent while the MSCI Emerging Market Index is down 14 percent in dollar terms, this drop becomes larger, if calculated  in local currency.

JP Morgan's Adrian Mowat paints a gloomy picture for emerging markets. After meeting several market participants across US and Europe, he said, "Clients are unanimously bearish, consistent with our view. We did not meet a single EM bull!"

He adds that while the EM bond and forex selloff were on top of everyone's mind, there is also caution when looking at China's growth outlook and skepticism when it comes to India's promise to lower current account deficit and the valuations on offer.

HSBC has a similar view, and has cut its rating on emerging markets to underweight.  HSBC's global strategist Garry Evan said, "With growth likely to remain scarce, our investment stance is to favour regions and sectors with strong earnings momentum. At the regional level, we remain overweight the US, where earnings revisions are strong and we see potential for further upgrades."

HSBC expects china to grow by just 7.4 percent this year and the next, as the new government places more emphasis on reform.

But there are a few like  Citigroup who are a little less pessimistic. It feels EMs can reverse their under-performance to developed markets in the second half of fiscal year 2014.

Citi's note says its main reasons for optimism are: consensus is too bearish or underweight on EMs, liquidity is ample, economic surprises are improving, earnings are outperforming developed markets and valuations look cheap.

However, even Citigroup is underweight on India and Brazil. But the bottomline is that the jury is still out on the kind of investment future emerging markets will enjoy. And it all hinges on how quickly their currencies come to grips with the dollar.