Liquidity crunch and emerging market crises

IN financial markets, very few things can be expected to repeat regularly like clockwork. Crisis periods in emerging markets (EM) are one such occurrence that we see every four to five years.

EM crises can also be once-in-a-lifetime opportunities. I witnessed this first-hand early in my career when one of my oldest clients, an experienced EM bond investor, put his whole portfolio into Russian bonds during the 1998 crisis, starting his purchases at 65 cents on the dollar, and continued buying every week all the way down. His last purchase was a 12.75 per cent coupon Russian government bond bought at 21 per cent that was just issued six months earlier at a full price of 100 per cent, as the country defaulted on its internal debt and announced capital controls.

Not knowing any better but feeling that I needed to communicate to him some kind of warning that he was losing a lot of money, he said: "Son, this kind of crisis will happen two or three times in your life. During calm markets, it is easy to quote Rothschild's "buy when there's blood in the streets", but as you can see, it's a whole different thing to actually do it in the middle of a crisis."