Investor sentiment toward emerging markets has always been fickle. While emerging markets were the darling of investors after the global financial crisis, they now appear to be in retreat taking with them the currencies of South Africa, India, Brazil and Russia, which have respectively depreciated this year by 16 percent, 11.5 percent, 10.5 percent, and 4.5 percent.
Will emerging markets continue to be a good place to invest? Rather than draw general conclusions, let's look instead at the data to try to distill what is noise, what is temporary and what is structural. Specifically, consider nations that "walk the talk" of structural reform instead of stop gap measures that don't have lasting impact.
Out of the "BRIC" (Brazil, Russia, India and China) subgroup, China stands out as the one country willing to do the dirty work of structural reform at the risk of upsetting the powerful, entrenched constituency. Brazil largely squandered a golden opportunity for reforms when it had low inflation, high growth and an immensely popular president. India has done a great job talking about reforms but little evidence of change has ensued. In Russia, the rule of law has deteriorated, not strengthened, and it remains an oligarchy with little more than rich mineral resources.
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It is no wonder then that China has been the one to take a leading role in a multilateral, defensive plan to establish currency reserves. The "BRICS" (including South Africa) announced a $100 billion currency reserve this month at the Group of 20 Summit, aimed at providing liquidity should there be a sudden stop of capital and allowing them to shore up their currencies against sharp depreciation.
Such lines of defense have been deployed in the past. In the aftermath of the Asian financial crisis, ASEAN countries formed the Chiang Mai Initiative, which established a pool of reserves among many Southeast Asian nations that bore the brunt of the financial crisis. The availability of this capital in and of itself is meant to be a deterrent, especially to speculators wanting to make a fast buck by shorting vulnerable currencies.