Stephen Jen landed in Hong Kong in early January 1997 as Morgan Stanley's newly minted exchange-rate strategist for Asia. He was soon working around the clock when investors began targeting the region's currency pegs, first felling Thailand's in July. The rout spread through Asia before rocking Brazil and Russia. It led to the collapse of Long-Term Capital Management, an event that introduced the Federal Reserve-brokered bailout.
If the 48-year-old native of Taiwan, with a PhD from Massachusetts Institute of Technology, sounds a little jaded now, it’s not without some reason. He worries that many emerging-market analysts are too young to remember the late 1990s. Instead they learned the ropes in an era dominated by the rise of Brazil, Russia, India and China -- a supposed one-way bet to prosperity. “Many became EM specialists after the term ‘BRIC’ was coined in 2001 and don’t know any serious crisis,’’ says Jen, who now runs the London-based hedge fund SLJ Macro Partners LLP. The youngsters are about to be schooled.
Jen says echoes of 1997-1998 may be at hand. Investors woke up today to Russia’s 1 a.m. interest-rate increase to defend the ruble. There’s the mounting likelihood of a Venezuelan default. Stocks from Thailand to Brazil are reeling. The Fed hasn’t even begun raising interest rates. Jen is bracing for more pain.
“At some point, the risk of fractures in parts of EM will rise sharply,” said Jen.
While unwilling to draw up a blacklist for now, he says exchange rates reveal emerging-market dangers. Russia’s ruble, Brazil’s real, Mexico’s peso, Turkey’s lira, the South African rand and Indoniesian rupiah have all hit the skids. The biggest causes for worry, bigger than a recession in Russia or the oil-price plunge: the slowdown in China, which has already upended commodity prices, and the likelihood US growth will propel the dollar higher and suck assets out of emerging markets.
Sounding a similar alert, the Bank for International Settlements has warned an appreciating dollar could have a “profound impact” on the world economy. It estimates that international lending to non-financial companies totalled $9.5 trillion at the end of June. Claims on China alone have been growing at an annual rate of 50 percent to reach $1.1 trillion.
International Monetary Fund economists also reported this month that the frequency of sovereign debt crises is 15 per cent higher at the start of a US monetary tightening cycle.
“My long-standing view on EM currencies is that they could melt down because there has simply been way too much cumulative capital flows,” said Jen. “Nothing the EM economics can do will stop these potential outflows as long as the US economy recovers.