Emerging markets send two big warnings to investors

With the eyes on the US presidential election and the second wave of Covid-19, investors around the world can be forgiven if they have missed two important warnings from emerging markets.

However, with the election (almost) out of the way, it may be time to go through the rest of the news flow and think properly about the two events that may have been overlooked: the postponing of the world’s biggest stock listing (China’s Ant Group), and the firing of the governor of the Turkish central bank.

These may seem like two very different events, but they have something in common: they were both orchestrated by undemocratic regimes run by strongmen who used the state to showcase their power.

Ant Group, Alibaba’s financial business, was supposed to be listed in Shanghai and Hong Kong last week in an initial public offering (IPO) that had been estimated to raise around $37 billion, making it the world’s biggest IPO.

But two days before the IPO was due to take place, the head of the business, outspoken businessman Jack Ma, was called in for questioning by regulators, and China changed the rules on financial technology.

“This material event may cause your company to fail to meet the issuance and listing conditions or information disclosure requirements,” the Shanghai Stock Exchange said in a statement sent to the company and its underwriters. “Our exchange has decided to postpone the listing of your company.”

The underwriters of the Ant Group IPO included US investment banks that are well known internationally, such as Goldman Sachs and JP Morgan.

According to the new rules, internet platforms will have to provide at least 30% of the funding for the loans they extend to customers and to cap loans at around $44,500 or a third of the borrower’s annual salary, whichever is lower, the Financial Times reported.

Ant Group funds only around 2% of its total loans currently, with the reminder coming from other sources such as banks. These changes could significantly affect its business model and its value, as the company would suddenly appear much riskier.

The intention behind changing the rules may be good – to rein in dangerous credit and try to stop a company that is too big to fail from, well, failing – but the timing of their announcement makes it look suspiciously like an attempt from the Chinese Communist Party to show Jack Ma who is boss.

Jack Ma is well known for his outspoken style and for not mincing his words. He is also very charismatic and well known and appreciated, both in China and abroad. He was becoming a danger for a communist regime which, as it has done in other countries that “enjoyed” its rein, has always attempted to clip the wings of those who dream too big.

Dictating to the central bank

Over in Turkey, the firing of the national bank governor was a less prominent event, but arguably no less significant for observers of emerging markets.

Fishing in Istanbul.

Murat Uysal, the governor of the central bank, was fired by presidential decree early Saturday morning, without any reason given by Turkish president Recep Tayyip Erdogan for his dismissal.

However, he did hike the key interest rate by two percentage points to 10.25% in September, and everybody knows Erdogan does not like interest rate increases.

Uysal had been only one year and four months into his four-year mandate, having been appointed after Erdogan fired his predecessor in July last year. The Turkish lira has fallen more than 30% versus the dollar year to date.

This move demonstrates that the Turkish central bank, despite being nominally independent, is anything but; Erdogan simply fires governors who refuse to do his bidding.

These are two important lessons for investors: yes, emerging markets are attractive for the higher yields they offer. But, in a world where more stable countries often offer negative yields, are the risks posed by unpredictable dictatorial decisions priced in appropriately?