For emerging market equity investors there is no hopeful outlook for 2009, no rallying cry of "the darkest hour is that before the dawn." In the words of one industry veteran: "It is darkest before it gets pitch black. The visual is the bottomless pit," emerging market stock broker Jonathan Auerbach, co-founder of Auerbach Grayson, said of present market conditions.
Along with partner David Grayson, the New York-based specialist emerging market equity broker turns over $100 million to $150 million a day for its 500 US institutional investors trading stocks around the globe - and around the clock.
"These are really terrible times in terms of trading," Auerbach told Reuters in a recent interview off the trading floor in a midtown Manhattan loft.
In November, the firm, with brokerage partners in 120 countries, let go five employees, their first layoff since its creation in 1993. Auerbach Grayson has 70 employees.
A recession in the Northern Hemisphere and widespread risk aversion means demand for goods and services from the developing world has dropped, causing investors to pull back en masse from emerging markets.
MSCI's benchmark emerging markets stock index fell 54.48 percent in 2008 and is down another 7.56 percent so far in 2009. It is currently trading down 60 percent from its peak on November 1, 2007. Auerbach said he does not expect many, if any, emerging market companies to issue initial public offerings of shares over the next 18 months. Asked where the IPO market is now, Auerbach's answer was stark: "Dead, non-existent ... I would be surprised to see it come back this year. Might be early 2010."
"We've been very instrumental in emerging market IPOs, but at the moment I see very little. It is just difficult," he added. According to Thomson Reuters data, emerging market IPOs plummeted 71 percent in 2008 to $41 billion from $139 billion in 2007. Year-to-date only six IPOs worth a total of $129.1 million have been issued from emerging markets, the data show.
"There's going to be some awful recessionary numbers through 2010, but the turnaround is going to come out of the emerging world," he noted.
The International Monetary Fund forecasts a contraction of 2.0 percent in industrialised countries' economic activity in 2009 compared with 3.3 percent growth in emerging market economies.
Even though economic activity is declining, Auerbach expects inflationary pressures to build over the next 18 months because central banks are printing money in the hope of inflating their way out of recession.
As a result, he is recommending clients buy companies with hard assets to sell. "At a certain point, whatever it is, the inflationary impact has to hit," he said.
In a country like Zimbabwe where annual inflation stood at a staggering 231 million percent according to the most recent data, Auerbach sees opportunity.
"If you want to buy some Zimbabwe stocks, I'll get you in there. I'm not saying I'll get you out, but I'll get you in. I think (Zimbabwe) stocks are very cheap because in a classical sense stocks are a great hedge against inflation," he said.
On February 03, the central bank lopped off another 12 zeros from its currency to try to tame hyperinflation brought on by an economic collapse under President Robert Mugabe.
Mugabe, who turns 85 this month and has been in power since independence from Britain in 1980, accuses Western countries of sabotaging Zimbabwe's economy.
Britain, one of the fiercest critics of Mugabe, accuses him of destroying the economy of the formerly prosperous country and using militias to violently suppress opposition.
"I have had clients, some very sophisticated people, who have been accumulating positions in Zimbabwe for the last two years," Auerbach said. A new coalition government is slated to take over February 13.
Auerbach and Grayson visit every country before establishing a local partnership.
While they are linked to hostile territories, the war in Iraq has kept them out of that market.
"I would love to be in Iraq right now but we didn't even bother having a coin toss. Neither one of us really wants to go to Baghdad right now. Hopefully that will change later this year."
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