Commodity prices have plunged; the decline has accelerated over the last year. Currencies have witnessed devaluations, and stocks and bond routs have prevailed across most emerging markets; capital outflows have hit some $735 bln in 2015; $448 bln in outflows are expected this year. Overall, during 2015-2016, safe-haven assets in advanced nations will attract about $1.2 trln in investment, as estimated by the Washington-based Institute of International Finance. Bucking the trend, US Treasuries are rising in price, causing a decline in yield and intimidating US growth prospects, while one of the least likely safe-haven assets, the Japanese yen, is rising against the dollar, harming the nation’s exporters.
Imbalances in international capital flows are being exacerbated amidst the developing nations’ gloom as the slump in commodities, economic and political mismanagement and corruption have triggered massive outflows, with investors seeking safer assets in developed markets. An influx of some $735 bln in capital in 2015, with another $448 bln due in 2016, is hardly good news for the advanced economies, as the abundance of international investment is heating up the hottest sectors, like banking and overall finance, barely reaching the real economy.
Consequently, the global capital flows’ discrepancy might trigger dangerous imbalances within the advanced economies.
In 2015, China alone lost some $676 bln of investment capital, according to IIF data. IIF’s previous estimates placed the total amount of emerging markets outflows for 2015 at some $348 bln, but the actual number turned out to be about twice that much.
The number of jobless people in the world is set to rise this year, as problems in emerging markets prevent the global unemployment rate from returning to pre-crisis levels.
The International Labour Organisation, a UN agency, forecasts that the number of unemployed people in emerging and developing countries will increase by 4.8m in the next two years.
In particular, rising jobless numbers in China, Brazil, Russia and elsewhere will offset improvements in the US and Europe, it says. The ILO’s annual employment report warns will such problems will hold back the expansion of the middle class and risk fuelling social discontent.
“The significant slowdown in emerging economies coupled with a sharp decline in commodity prices is having a dramatic effect on the world of work,” Guy Ryder, the ILO’s director general, said.
The rise in the number of the world’s jobless from 197m in 2015 to 199m this year, would keep 2016’s global jobless rate at 5.8 per cent — the same as the last two years — because of population growth.
Some ‘aches and pains’ are constraining the global economy, with JPMorgan warning of more severe strains occurring in the emerging world. These aggravating but generally not life-threatening conditions are meant to convey a slow growth world, but, JPM is careful to note, not one on the immediate precipice of collapse or recession.
The key issue for 2016 then is whether economic illnesses in emerging markets will result in contagion in the developed world as “dollar altitude sickness” and “earnings anemia” do little to support the domestic ‘immune’ system.
Every year, roughly $1 trillion flows illegally out of developing and emerging economies due to crime, corruption, and tax evasion. This amount is more than these countries receive in foreign direct investment and foreign aid combined.
This week, a new report was released that highlights the latest data available on this “hot” money. Assembled by Global Financial Integrity, a research and advisory organization based in Washington, DC, the report details illicit financial flows of money from developing countries using the latest information available, which is up until the end of 2013.
Rating agencies do not systematically discriminate against emerging market countries by unfairly awarding them lower credit ratings than developed nations, according to analysis published by the Bank for International Settlements.
Emerging market governments and investors have long argued they are the victims of an ingrained bias against them by Fitch Ratings, Moody’s Investors Services and Standard & Poor’s, the three US-based agencies that dominate the sector.
In particular, they argue it is wrong that EM sovereigns typically have a lower credit rating than developed world governments despite, in most cases, having a lower debt burden as a proportion of gross domestic product.
Analysis by Frank Packer of the BIS and Marlene Amstad of the Chinese University of Kong Kong, Shenzhen, demonstrates clearly that EMs tend to have lower ratings than developed economies despite being less indebted.
Look carefully into the middle distance. Can we see the long-awaited bottom for emerging markets from here?
Market sentiment turned brutally and decisively against the emerging world five years ago. Since then, stock markets have steadily dropped further behind the developed world, currencies have devalued and countless indicators of economic health have grown ever more sickly.
Emerging markets have always been a story of commodities. It is the emerging world, led by China, that largely produces and consumes industrial commodities. In practice, at least when viewed through the lens of markets, emerging market stocks make up a complex with other assets tied to the health of the resources economy.
Some of those assets are now hitting the kind of lows that suggest the cycle cannot have much further to go. The price of iron ore in Qingdao, the widely accepted benchmark for Chinese metal consumption, is down 76 per cent from its 2011 peak. The broader Bloomberg industrial metals index is also at post-crisis lows.
The Baltic Dry index, a measure of the cost of shipping commodities around the world, subsided this week to its lowest ever. It has now dropped 95.5 per cent from its peak set in 2008, shortly before the financial crisis. Such numbers raise hopes that the cycle is ready to turn, and some analysts — notably Capital Economics of London, which has boldly suggested emerging markets are a “buy” for a few months — believe the bottom is close.
The sell-off in emerging market equities has pushed valuations to an all-time low, by one measure at least, reflecting the marked underperformance of the asset class since the immediate aftermath of the global financial crisis.
Emerging market equities have delivered a total return of minus 2.1 per cent since
Despite this potential buy signal, analysts are not queueing up to argue that emerging market equities are wildly undervalued.
“The latest leg of correction leaves emerging markets as the unambiguously cheap segment of global equity on a fundamental basis [but], with the exception of Russia, valuations simply haven’t become cheap enough,” says George Iwanicki, emerging markets macro strategist at JPMorgan AM.
The MSCI Emerging Markets Index fell to a valuation of just 12.8 times 10-year average earnings at the end of September, according to calculations by JPMorgan AM, taking it below the previous nadir of 13.5 times during the 1997-98 Asian financial crises.
The cyclically adjusted price-to-earnings multiple is now barely half its long-term average of 25 times average 10-year earnings.
In contrast, the US S&P 500 index is trading at 23.4 times cyclically adjusted earnings, within a whisker of its long-term average of 23.6. The MSCI Europe Index is at 15.1, against an average of 20.6.
The main divergence we have emphasized is in monetary policy trajectories. The first phase, which began late last year and will run through this month is other countries taking action to ease policy. The Fed stood pat. The second phase is when the Fed lifts rates and many others continue to ease, perhaps at an accelerated rate.
There is another divergence that is taking place. As thisGreat Graphic, created on Bloomberg, shows, the MSCI Emerging equity market index (yellow line) is widely under-performing MSCI’s World Index, which tracks developed countries’ equities (white line).
As the chart illustrates, in the first quarter, the two were comparable. When it become clear due to the weakness of US Q1 economic data that the Fed was unlikely to raise rates in June, the dollar fell and emerging markets outperformed in April and May. Commodities in general, and oil in particular rallied during then as well. The CRB index peaked in May as did oil. Emerging market equities unwound the overshoot, and by the end of Q2 were actually under-performing the developed equities by a fraction.
Between the end of June and late-August, oil fell by a third. The price of copper fell by a quarter from May through August. The Greek political drama and worries about the Chinese economy were also a weight. The reversal of the Chinese stock market also took a toll. From the February low through the June high, the Shanghai Composite rallied 70%. From the June high to the August low, the Shanghai Composite lost 45%, which was sufficient to push it to new lows for the year.
No, it’s not very scientific. Still, word counts from the minutes accompanying the Bank of England’s decision to keep interest rates on hold today help to understand what keeps the rate setters up at night.
The word ‘Greece’ gets just one mention, and that’s in a relatively positive light. (“The decisive result of the general election in Greece had reduced the risk of political deadlock in the near term, but had not materially altered the medium-term risks,” the BoE says.)
“China or Chinese”, meanwhile, get 11. UK rate setters are watching carefully.
Brazil too is on the radar, with a relatively glancing two mentions, but it is held up as a key example of the stress infecting emerging markets.
On that note, the BoE said: “Key questions were how pronounced the on-going slowing in the emerging market economies would turn out to be, and to what extent this would spill over to activity in the advanced economies.”
Oil had six mentions, in the context of its dampening impact on inflation, and the signals it sends on global demand.
Moments ago the IMF did what it does best: it just cut its forecast for global growth yet again. Specifically, it said that “global growth for 2015 is projected at 3.1 percent, 0.3 percentage point lower than in 2014, and 0.2 percentage point below the forecasts in the July 2015 World Economic Outlook (WEO) Update. Prospects across the main countries and regions remain uneven. Relative to last year, the recovery in advanced economies is expected to pick up slightly, while activity in emerging market and developing economies is projected to slow for the fifth year in a row, primarily reflecting weaker prospects for some large emerging market economies and oil-exporting countries.”
What is surprising about this particular estimate is that the IMF did not cut any of its core geographic regions: both Europe and China saw their 2015P GDP forecast remain unchanged (at 1.5% and 6.8%), while the US was raised modestly from 2.5% to 2.6% (it will soon revise this lower again). As a result, the driver for the cut in global growth was to a lesser extent Japan, which was revised from 0.8% to 0.6%, but it was the EM and oil exporters that saw the biggest cuts, with Russia (-0.4%), Brazil (-1.5%) and Canada (-0.5%) cut the most.
The culprit, indirectly, was once again China. To wit: