Archives of “emerging markets” Tag

World should fear an emerging market rout

Capital is cascading out of emerging markets as investors, companies and financial institutions lose confidence in developing countries. The outflows, which have risen towards $1tn over the past 13 months, hold a significance that extends well beyond the frailties of the countries themselves. The dynamism of developing nations helped restore the world to growth in the aftermath of the 2008-09 financial crisis. It is now dissipating fast.

Their vitality is being sapped by a vicious circle of cause and effect. Capital outflows add to pressures on emerging market currencies to weaken against the US dollar, thus inhibiting import demand, damping economic growth and spurring further outflows. If the cycle cannot be arrested, the risk is that a growth slump in developing countries — which account for 52 per cent of global gross domestic product in purchasing power parity terms — could pull the wider world into recession.

The resilience of emerging markets may be critical. But the prognosis is poor. To an extent, the growth model that generated rapid economic expansion over the past three decades appears to be broken. David Lubin, head of emerging market economics at Citi, says three key engines of GDP growth — exports, public domestic spending and private domestic spending — are all sputtering.

Exports are hobbled by a collapse in the growth of global trade. Public spending is weak because many countries are too nervous to loosen fiscal policy, fearing a loss of sovereign creditworthiness at a time when capital inflows are scarce. And private domestic spending is hampered by the fact that credit markets in many countries are in “post-boom” mode: neither domestic lenders nor borrowers have much appetite for risk, Mr Lubin adds.

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MSCI Emerging Markets Index has fallen to a four year low

The MSCI Emerging Markets Index has fallen to a four year low according to Bloomberg, as large outflows from EM funds continue amid fears that EM equities will keep sliding along with currencies and economic growth.

Emerging markets have been struggling on several fronts this year, as currencies fall to multi year lows, growth stagnates, stock markets wobble and now bonds are showing the first signs of pressure.

Last week outflows from emerging market equity funds continued for a fifth week, pushing the total outflow for the year to $31.9bn.

Drooping emerging market currencies have roiled markets and helped spur outflows, and the situation was compounded last week by China’s decision to allow its currency to devalue. Large outflows in turn are putting further pressure on currencies, creating a negative feedback loop.

The JPMorgan Emerging Markets Currency Index has fallen to its lowest level since it was founded in 2000.

Hong Kong listed stocks, which account for a large bulk of the MSCI index, do not paint a pretty picture. The Hang Seng Index is down 0.7 per cent today and has dropped 10 per cent since its year high in May.

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US ‘Torpedoing’ Major Projects of Developing Countries Like China-Led AIIB

Nobel Prize-winning economist Joseph E. Stiglitz argues that emerging markets are capable of carrying out major projects “with high social returns” and intend to create new economic institutions which would benefit the developing world. Rich countries are not thrilled by the prospect.

 Needless to say, the United States is not happy about it and is doing all it can to maintain its grip on the global financial architecture and undermine these initiatives, he wrote in an article titled “America in the Way.”
Stiglitz praised emerging markets for succeeding in “truly enormous” tasks, ranging from infrastructure development to the shift to a green economy. Developing countries, according to the economist, “have demonstrated their ability to absorb huge amounts of money productively.”

What they need is long-term investment. The West could offer the much needed funds through global financial markets. “The problem … is that the world’s financial markets, meant to mediate efficiently between savings and investment opportunities, instead misallocate capital and create risk,” Stiglitz stated.

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BREAKING-S&P lowers Brazil sovereign credit rating to negative from stable

Current rating is BBB-

  • Sees 2% contraction in Brazilian GDP this year
  • ‘Number of investigations of corruption among certain circumstances despite significant policy correction during Dilma Rousseff’s second term
  • Expect govt deficit to rise to 7.5% of GDP from 6.1% in 2014
  • FDI not expected to cover 4% current account deficit in 2015-17
  • Outlook is negative because execution risks to policy changes have risen

The sluggish trend in emerging markets continues.

USD/BRL at the highest in more than a decade, up 2% today.

Emerging markets poised to raise interest rates

Analysts are calling a turn in the emerging market monetary policy cycle, with more central banks likely to raise interest rates in the coming months than cut them.

The move could exacerbate an economic slowdown that has led to a rise in unemployment in many emerging markets. It comes as the vast majority of developed markets, with the exception of the US and UK, are still in easing mode.

So far this year, more emerging markets have cut rates every month than raised them. This has largely been the pattern since the start of 2012, as sluggish global growth has encouraged central bankers to loosen policy and muted inflation has given them the headroom to do so.

However, that pattern has reversed so far this month, with three EM nations, Kenya, Uganda and South Africa, tightening policy and only one, Hungary, easing (see chart).

Some analysts believe this is the start of a trend, rather than a statistical blip, amid an expectation that inflation has troughed and started to rise.

“Interest rates are at or very near cycle lows now in many parts of the emerging market world and economic conditions seem to be stabilising in many places,” said Mark Williams, chief Asia economist at Capital Economics, who sees looming rate rises in Brazil, Mexico, Turkey and Nigeria.

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The End Of The Supercycle? Commodity “Capitulation” Arrives

In a note by BofA’s Michael Hartnett titled “When Supercycles end”, the bank looks at the latest EPFR fund flows and concludes that the wave of commodity “capitulation” revulsion selling has finally arrived.

Specifically, looking at fund flows, the most recent week saw the biggest outflow from precious metals in four months and emerging market fund outflows reaching $10 billion over the last two weeks leading Hartnett to conclude that “capitulation is beginning in EM/resources/ commodities.”

This is what the most recent flows looked like:

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Peter Schiff On The Big Picture: The Party’s Ending

The past four years or so have been extremely frustrating for investors like me who have structured their portfolios around the belief that the current experiments in central bank stimulus, the anti-business drift in Washington, and America’s  mediocre economy and unresolved debt issues would push down the value of the dollar, push up commodity prices, and favor assets in economies with relatively low debt levels and higher GDP growth. But since the beginning of 2011, the Dow Jones Industrial Average has rallied 67% while the rest of the world has been largely stuck in the mud. This dominance is reminiscent of the four years from the end of 1996 to the end of 2000, when the Dow rallied 54% while overseas markets languished. Although past performance is no guarantee of future results, a casual look back at how the U.S. out-performance trend played out the last time it had occurred should give investors much to think about.
The late 1990s was the original “Goldilocks” era of U.S. economic history, one in which all the inputs seemed to offer investors the best of all possible worlds. The Clinton Administration and the first Republican-controlled Congress in a generation had implemented policies that lowered taxes, eased business conditions, and encouraged business investment. But, more importantly, the Federal Reserve was led by Alan Greenspan, whose efforts to orchestrate smooth sailing on Wall Street led many to dub Mr. Greenspan “The Maestro.”
Towards the end of the 1990’s, Greenspan worked hard to insulate the markets from some of the more negative developments in global finance. These included the Asian Debt Crisis of 1997 and the Russian debt default of 1998. But the most telling policy move of the Greenspan Fed in the late 1990’s was its response to the rapid demise of hedge fund Long term Capital Management (LTCM), whose strategy of heavily leveraged arbitrage backfired spectacularly in 1998. Greenspan engineered a $3.6 billion bailout and forced sale of LTCM to a consortium of Wall Street firms. The intervention was an enormous relief to LTCM shareholders but, more importantly, it provided a precedent that the Fed had Wall Street’s back.
Not surprisingly, the 1990s became one of the longest sustained bull markets on record. But in the latter part of the decade the markets really started to climb in an unprecedented trajectory.  As the bubble began inflating in earnest Greenspan was reluctant to follow the dictum that the Fed’s job was to remove the punch bowl before the party got out of hand. Instead he argued that the Fed shouldn’t prevent bubbles from forming, but simply to clean up the mess after they burst.
But while U.S. markets were taking off, the rest of the world was languishing, or worse:

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Fitch: India, China Growth to Diverge Further Through 2017

Hong Kong-01 July 2015: Emerging Asia will continue to experience relatively high rates of growth over the medium term as economic prospects remain starkly divergent across emerging markets, according to Fitch Ratings’ latest Global Economic Outlook report. Growth should improve steadily through to 2017 for emerging Asia excluding China on aggregate. This should occur even as China continues to experience a gradual structural slowdown.

Differing exposures to key global macro trends – including the fall in commodity prices and likely rise in US interest rates, as well as country-specific factors – will continue to contribute to substantial differentiation in growth rates in emerging markets over the next few years. Fitch forecasts aggregate growth in emerging Asia excluding China to accelerate to 6.7% in 2016 from 6.4% in 2015, although robust Indian growth masks a weaker performance relative to the recent trends in other large regional economies such as Indonesia and Malaysia. Fitch forecasts China’s growth to slow to 6.8% in 2015 and 6.5% in 2016 as rebalancing continues. 

The region’s performance is projected to be markedly stronger than in other big emerging markets. Russia and Brazil are forecast to record substantial contractions in GDP in 2015 (-3.5% and -1.5%, respectively), followed by a weak recovery in 2016 and 2017. 

India will be key in lifting the aggregate regional growth rate, accounting for almost half of the forecast growth for the region excluding China. Notably, Fitch expects that India’s GDP growth rate this year will surpass China’s for the first time since 1999, forecasting an acceleration to 8.1% in 2016 (FY17) before settling back to 8.0% in 2017 (FY18). The implementation of structural reforms and resulting pick-up in investment remain key themes for India’s growth outlook, and recent data confirm the strengthening demand.

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‘Picts’ most exposed to Fed rate rise fallout

Never mind the Brics or the Fragile Five — the Picts is the new emerging market group investors should worry about as they look ahead to US interest rate rises.

Analysts are divided on whether the Greek crisis will have much lasting impact on EM assets, though few doubt it has racked up the tension. What they do agree on is that the overriding focus for markets in the second half of the year will be the US Federal Reserve.

Predicting what the Fed will do and how investors will react has thrown up its own sub-genre in the business of EM research.

JPMorgan set the standard during the “taper tantrum” of 2013 by identifying the Fragile Five, also known as the Biits — Brazil, India, Indonesia, Turkey and South Africa — that were most exposed to the beginning of the end of the Fed’s $85bn a month asset buying programme, or quantitative easing. They were marked out by having large or poorly financed current account deficits, high rates of inflation and other imbalances.

Richard Iley, chief EM economist at BNP Paribas, added to the genre last week by telling investors to beware the Picts — Peru, Indonesia, Colombia, Turkey and South Africa — which he says are now the most vulnerable as the Fed, having done with QE, prepares to raise interest rates for the first time since 2006. He ranked 16 big emerging markets from 1 to 16 on 20 macroeconomic variables and totted up the scores. The Picts came out the worst.

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The problem with emerging markets

It was not too long ago that the emerging markets were regularly eulogised as the permanent powerhouses of the world economy. During the 2000s, with excitable neologisms like Brics (Brazil, Russia, India, China, South Africa) coined in their honour, the big emerging economies drove a boom in global output and trade.

And when the rich world suffered a dislocating shock during the financial crisis in 2008, many middle-income nations, with relatively resilient banking systems and large foreign exchange reserves, rode out the turbulence and rapidly resumed growing.

That euphoria, which has been subsiding for years, is now at a low ebb. This week the World Bank warned of a “structural slowdown” as developing nations ceded the leading role on global growth to the rich world. A decline in import demand means emerging markets subtracted from world trade growth in the first quarter of this year for the first time since 2009.

In reality, weaknesses within the emerging world have been evident for some time. Few countries have built the kind of diverse high-productivity economy that will propel them into the first rank of rich states.

According to a study by the International Monetary Fund, the slowdown in trend growth in middle-income countries has been in train since the crisis. For years, weak productivity improvements were masked by low interest rates, helped by quantitative easing in the US, and by high commodity prices.

Those props are now being kicked away and, with the US Federal Reserve yet to raise rates, there may still be a bigger squeeze to come. The growth model of countries like Brazil has been exposed. Chronic deficits, high inflation and an overvalued exchange rate have left the country with no alternative but tighter monetary policy and a recession. The evaporation of a favourable external environment exposes the past failure to reform. One or two leaders, such as Narendra Modi in India and Joko Widodo in Indonesia, are belatedly trying to reorient government spending away from wasteful subsidies and towards productive investment, but it will take time.

The process of poor countries getting rich, much of which used to be driven by export-led manufacturing, has become more complex. Emerging economies are routinely turning away from manufacturing at much lower levels of income than earlier waves of industrialisers. An apparent structural fall in trade growth relative to overall expansion, probably as a result of nations like China taking more of their supply chains in-country, means less chance for other developing countries to export their way to prosperity.

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