Some analysts say March was a one-off for emerging markets, which can only stand to lose more with liquidity dampened, and restrictions imposed on short-selling. But mismatches between fundamentals of developed and developing markets offer investment opportunities. The financial crisis has in fact caused some developed countries to have characteristics of emerging market economies.
Karthik Sankaran is the principal and portfolio manager of emerging markets trading and investment firm Coverpoint Capital Advisors. He says that when it comes to currencies there are some good opportunities. Liquidity in the FX markets has remained strong throughout the crisis, which is further encouraging participants. "Emerging markets countries spent the last few years leveraging down and only a handful had access to western banking systems. By contrast, some developing economies that were considered rich countries were far too levered. Iceland’s banking system was eight times larger than its GDP, and overseas debt was 50 times larger. No emerging country would have been allowed to do that," says Sankaran. Yet Iceland is still rated higher than Brazil, he adds.
Historical parallels
Sankaran says that there are several developed economies in the eurozone that have emerging market-like problems. "There are historical parallels with emerging economies," he says.
