Report highlights significant impact of move to “free float” adjustment in equity indices
| Author | Subir Lall |
| Position | IMF Research Department |
| Pages | 396-397 |
Page 396
With global markets beginning to factor in a slowing U.S. economy, higher oil prices, and a weaker euro, the performance of emerging market assets diverged sharply in the third quarter of 2000. Equity markets almost unanimously registered losses in the period, while emerging debt markets ranked as the best performing fixed-income asset class. The current issue of Emerging Market Financing, which is published quarterly on the IMF’s website (www.imf.org) and is an integral part of the IMF’s surveillance of capital market developments, analyzes the causes and consequences of this bifurcation between bond and equity markets, and examines several structural changes in emerging market financing, the outlook for emerging market financing in the near term, and potential risks (such as those posed by the convergence of yields of U.S. high-yield, or “junk,” bonds and emerging market bonds).
In the third quarter, emerging market debt, which rose 5.2 percent, outperformed all other fixed-income asset classes. Emerging market equity, which experienced a 13 percent decline, was among the worst performers. According to the report, some of this divergence can be traced to global fund managers who shifted from equity to bond markets in the face of a U.S. slowdown, with the accompanying decline in corporate earnings and lower interest rates encouraging this shift. High returns in emerging debt markets stemmed largely from positive developments in yields and capital gains on U.S. treasury securities (against which dollar-denominated emerging market bonds are priced) and from the high yields on emerging market debt. Perceived improvements in the quality of emerging market credit made a relatively modest contribution to the quarter’s returns. Asian debt was also supported by the relatively modest supply of sovereign debt from the region, with Latin America accounting for the bulk of new and outstanding emerging market bonds. Conversely, Asian companies dominate emerging market equities. Given the direct sectoral links between Nasdaq and global equity markets, and the larger proportion of technology shares in Asia, the region was more affected by the U.S. tech stock correction than other regions. Higher oil prices also had a greater impact on Asian equities, given the region’s higher dependence on...
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