The sunset of emerging stock markets

The expansion of the global financial crisis in the developed economies has led to a major redirection of capital flows towards the emerging markets. The ebullience seen on several Eastern European, Asian and Latin American stock exchanges has been attributed to the reforms and the liberalization of the domestic markets.

Sure there have been reforms and liberalization, but the nature of the growth of the last few years has been deeply flawed by the reliance on the foreign speculative investments.

Through their quantitative easing policies, the central banks of these countries have walked down the path of competitive depreciation of currencies against the major international currencies, forgetting about the importance of the accumulation of domestic capital.

Still a long way from the much preached convergence with the developed economies, emnerging countries have begun to feel their bright futures dissolving away. It would seem that the first step was made on their respective stock markets.

At the end of 2013, Warsaw Business Journal wrote that "an increasing number of brokerage firms are leaving the Polish market", as the new list includes Credit Suisse Securities, KBC Securities and Amerbrokers.

The reason is the significant reduction of the profit margins, which happened before the Polish authorities switched to the "reformation", through partial nationalization of the private pension funds.

At about the same time, Bloomberg wrote about the beginning of the exodus on the Prague Stock Exchange. "The only bank listed in the Czech Republic advises its customers to buy stock in the United States, France and Germany, amid the decline in transactions on the Prague Stock Exchange, whose main index saw the largest drop in Europe, after Cyprus", the article by Bloomberg writes.

It may not be a coincidence that Komercni Banka AS, owned by Societe Generale, recommends investing in France, but this recommendation should naturally be considered a joke. How "brave" would an investor have to be to invest in France when it is led by Hollande?

Perhaps the urge to invest on the American markets should be viewed as a joke as well, as the rise to record highs was caused by the Fed's quantitative easing, and the market has long since decoupled from fundamental factors. Over there it is no longer a question of investing, but of speculations amplified by the algorithms of the major players, which have come to account for over 80% of the daily turnover.

In its study of the Prague Stock Exchange, Bloomberg writes that the volume of transactions fell at an annual rate of 36% in the first half of the current year, as it has only 25 listed companies compared to thousands in the 90s, and the last IPO took place in 2008. The timing couldn't have been "better" for the proposal of the social-democrats, the biggest party in the Parliament, to raise taxes for big companies.

The fact that the Prague Stock Exchange is a member of the CEE Stock Exchange Group, organized by Wiener Boerse, which also includes the stock exchanges of Austria, Hungary and Slovenia, hasn't helped. The switch to the Xetra trading platform, in November 2012, was justified by "facilitating the access of foreign investors and expanding trading to markets which use the same platform", according to Bloomberg. However, the outcome was the fragmentation of trading and the accelerated drop of volumes.

Across the ocean, similar things are happening in Brazil. In a recent article published in Financial Times, which presents a short history of the rise and fall of Eike Batista, who until a few months ago was the richest businessman in Brazil, the authors write that his financial difficulties presage "harsh times for the business environment in the country".

The cause? The capital shortage, the same problem that all emerging economies have, as they thought that they can neglect that fundamental development factor, due to the easy access to the international speculative cashflows, inflated by the extremely aggressive quantitative easing policy of the main central banks.

But now, "the age of easy liquidity is over, and Brazilian companies have to fight their rivals on emerging markets for capital which is increasingly hard to find", FT writes.

Something has "come apart" in Brazil over the last few months, and it's not just the protests against the economic policies of the government, or else there would be no explanation to the recent decision of Goldman Sachs.

After announcing in April 2013, that it would hire new people, the American bank has dropped the plan, according to a recent piece of news by Bloomberg, as most of the employees of the investment division in Brazil have left, including half of its executive directors. "The outlook for the economy and for the merger and acquisitions segment have gotten worse than expected", one of the bank's spokespersons said.

It bears reminding that the Bovespa fell about 13% since April 2013, and Bloomberg writes that other foreign banks, including UBS and Barclays, are cutting their staff in Brazil, amid the drop in investment opportunities.

Shares of OGX Petroleo e Gas Participacoes SA, the most important company still controlled by Eike Batista, fell over 90% in the last year on the Sao Paulo stock exchange, and their weight in the index will increase to almost 5% starting September 2013, according to data by Bloomberg.

Will it be enough to stop the fall of OGX? No, of course. It would take a miracle for Batista's oil company, as its debts are huge, and creditors are panicking.

Bloomberg states that the sovereign investment fund of Abu Dhabi is faced with potential losses of over one billion dollars, following an investment in EBX Group, another one of the companies of the Brazilian millionaire.

The trend of foreign investors leaving the emerging markets will pick up steam, once the Federal Reserve goes from talk to action on its cutting of the quantitative easing program.

Only then will the true results of the liberalization and reforms trumpeted by the government and monetary authorities of those countries become visible.

What is happening in Romania? Not much. For now, major hope has been invested in the reinvigoration of the Pole Ludwik Sobolewski as the CEO of the BSE. Unfortunately, people are forgetting an essential detail: a stock market can't operate without capital.

And, as we have seen the emerging market trends, the "emerging" status can no longer be preserved by waiting for foreign investors.

We now need a major liberalization of the stock market, by opening direct access to the companies' stock, relaxing regulation, eliminating the taxation of the interest rates pertaining to bank deposits, eliminating the capital gains tax. In other words, measures that would stimulate savings and the formation of the nation's own capital.

Otherwise, once the current "order" on the emerging markets ends, we can wait all we want for other foreigners to come and help us exit the darkness.