Where is the Emerging Market Oil Dividend?
Oil Dividend Proves Elusive for Emerging Markets
Shares of importers such as South Korea, Turkey, and Thailand haven’t enjoyed the expected boost from lower prices. What happened?.
By
Feb. 27, 2015 11:34 p.m. ET
It’s a common, and seemingly commonsensical, assumption these days that if oil-exporting emerging markets like Russia and Brazil have been hammered by sinking crude prices, oil-importing countries must be sailing. The hot performance of the two oil-buying BRICs, China and India, since the crash started last summer seems to cement the theory—except it doesn’t.
The dominant China ETF, iShares China Large Cap (ticker: FXI), has indeed soared by 17% since July 1, when Brent crude oil started to slide from $110 a barrel to about $60 now. The corresponding India vehicle, iShares MSCI India (INDA), advanced 10%. But other factors are driving these gains—for India, prevailing optimism around new Prime Minister Narendra Modi, and for China, expectations that falling inflation will spur interest-rate cuts and other stimulus measures. “Disinflation is providing scope for expectations of policy easing—that’s what’s supporting the Chinese market,” says Rashique Rahman, who heads emerging-market fixed income at Atlanta-based asset manager Invesco.
China is not so energy dependent, anyway, in relative terms: Imports account for less than 3% of its gross domestic product. Petroleum purchases gobble about 5.5% of India’s GDP, but other countries in that range or worse have seen little or no cheap-oil dividend. A number of heavy energy importers depend on exports of other commodities that have not fared well, either, over the past half year. A prime example is South Africa, whose stock market has basically trod water thanks to dimmer outlooks for its exports of precious metals and coal.
But a long list of oil importers without offsetting raw-material exports have also produced little for investors. Shares in Thailand, where energy purchases eat up more than 10% of the economy, have risen a modest 5% since July 1, measured by iShares MSCI Thailand Capped ETF (THD). Two other nations that should have a lot to gain have actually lost ground: Turkey, where shares have slumped by about 4%, and South Korea, where they have crashed by 14%.
Every country has its own reason for disappointing. Turkish strongman Recep Erdogan and his creeping control over the central bank make investors queasy at almost any price. “Think of what happens to Turkey if oil prices go back up to $70-$80 per barrel,” Rahman says. “It suffers disproportionately.”
Korea is undermined by tepid export markets following a corporate debt binge. Thailand has the same problem, plus political troubles, as a military government tries to lock up deposed Prime Minister Yingluck Shinawatra. Poland’s oil dividend has been obliterated by euro-zone stagnation and restless Russia; its stocks have fallen 30% in eight months.
One conclusion is that emerging markets are just too complicated to comply with any single variable, even one as significant as a 45% drop in oil’s price. Another is that, by and large, the prevailing winds are still against the asset class. Slowdowns in every big export market except the U.S., the promise of tighter money from the Federal Reserve, and a dollar that is trampling on most other currencies as a result—all of these factors dim enthusiasm for oil importers and exporters alike. “All other changes are taking place against a background where the cost of capital for certain emerging-market companies is starting to go up,” says Rohit Chopra, a co-manager of Lazard Asset Management’s $13 billion Emerging Markets Equity Open Portfolio (LZOEX) fund.
While energy-importing emerging markets have performed unevenly, all of the exporting markets have tanked, even those whose policies investors like, such as Mexico and Colombia. Not a good sign.
