Emerging Markets Can't Evade a China Slowdown
https://www.bloomberg.com/opinion/artic ... emium-asia
The dollar is in a major decline.
A falling dollar takes a huge weight off these markets. That’s because emerging market companies often hold a lot of debt in U.S. dollars.
The MSCI Emerging Markets Index rallied more than 150% from 1987 to its peak in 1990.
Thanks to the Fed’s easy-money policies, the dollar is already falling. It’s down double digits since March. And that’s likely the start of a multiyear downtrend.
Emerging markets should be one of the biggest winners as this trend plays out. And I urge you to own them today if you don’t already.
Manufacturing reports from China, India, Brazil and South Africa, that are being published this week are potentially less decisive for investors than the global sentiment toward risky assets.
The wave of central-bank stimulus and investors’ hunger for yield had lifted developing-nation dollar debt for five months.
He said the Covid-19 pandemic is taxing emerging economies and their health systems more than developed countries, de-globalization is hurting the commodity-dependent countries and the group is more sensitive to effects of climate change.
Outside these global macro trends, a lack of trust in EM governments is further hurting the asset class.
Most traders are currently pricing in between two and three interest-rate increases of 25 basis points (bps) each by the United States Federal Reserve (Fed) for the second half of 2022.
A major surprise to the financial markets could trigger a capital flight, and thus huge currency depreciation in some EM economies.
Besides the risk of a more hawkish Fed, Nomura says, other factors that could result in more frequent EM crises in the years ahead include middle-income trap; negative real rates; twin-deficit risk; and crypto challenges.
Despite the various risks and uncertainties, Nomura acknowledges there will be some EM economies that will be fairly resilient.
There are 10, however, that will be more vulnerable, and these include Brazil, Colombia, Chile, Peru, Hungary, Romania, Turkey, South Africa, Indonesia and the Philippines.
A full percentage-point of Fed rate increases next year could shut some countries out of markets, further straining already vulnerable fiscal situations.
He pointed to Egypt, Pakistan and Ghana as nations already battling large debt obligations, narrower market access and, in some cases, double-digit inflation.
As for specifics, they are looking for a Chinese equity rally and gains in local-currency bonds in countries such as Poland, Czech Republic and Hungary.
“2021 has been a year when developed markets outperformed emerging markets in economic growth, and this needs to reverse".
MS - Big bets: Chinese equities, higher-yielding currencies including Brazilian real, Mexican peso, Russian ruble
GS - Big bets: Eastern European currencies, Chinese stocks
BNP - Big bets: China high-yield bonds, external debt in West Africa, local bonds in Poland, Czech Republic and Hungary
Pictet - Big bets: Bank stocks, ASEAN reopening opportunities
Finisterre Capital - Big bets: Local-currency bonds, external debt of oil producers such as Oman, Angola, Iraq, Ecuador, external debt of stressed countries such as Sri Lanka, Tunisia
Fidelity - Big bets: Indonesian equities, Chinese stocks and high-yield debt, central European currencies
Nuveen - Big bets: Hard-currency sovereign and corporate bonds, local bonds
The steepest selling was in tech-heavy Taiwan and South Korea and energy-importing India, while foreign investors also made supersized outflows from Indonesian bonds.
“We would expect investors to remain cautious toward export-oriented economies and markets with high valuation under the current backdrop. We expect the outlook to remain uncertain for the technology sector globally on rising recession risks.”
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