There is a big mess going on in Turkey. The country’s spat with the US is playing out in financial markets, and it is really starting to hurt. The Lira is dropping fast, and the country’s benchmark bond yield just hit a whopping 20%. The huge losses in the currency and bond market might also lead to a rout and/or chaos in the country’s banks, which are now only weakly capitalized.
FINSUM: It is important not to muddle Turkey with other emerging markets, as many of its problems are specific to itself. Still, there are similarities and a renewed widespread selloff does not seem out of the question.
Emerging markets had a rough first half to the year. Between rising western rates and a trade war, there was not a lot to be happy about in EM assets. Then, a few weeks ago, many sources were saying the bear market was over and it was time for a rally. However, investors need to stay sharp, as EM currencies are still sliding, which will lead to lower growth. Weaker currencies also make it hard to pay back Dollar-denominated debt, which could hurt credit. There are also country-specific issues, like the growing trade battle between Turkey and the US.
FINSUM: There are still a lot of macroeconomic developments moving against EMs, but to be fair, the best rallies start in the darkest hours.
Emerging markets have had a rough year, with many major indexes, including in China and Brazil being in or near bear markets. This has led to a great deal of anxiety over the direction of assets, both stocks and bonds, in EM nations. Well, July may be the start of a new phase, at least according to Goldman Sachs. The bank says the emerging markets have hit their bottom and are now poised for a rally. Goldman reminds investors that big asset price moves in EMs are not uncommon, and that this year’s losses are quite ordinary.
FINSUM: The big question here is whether EM equities or credit are a better bet at the moment. Looking historically, credit seems to have a better risk/reward proposition when getting in early in a rally.
Emerging markets have been on a wild ride this year, with many entering into bear markets. But what about EM debt? That market has faced headwinds as the US Dollar is strengthening on the back of expectations for higher rates. However, some bond fund managers really like EM debt right now. While USD denominated debt from countries like Argentina get a lot of the attention, local currency EM debt can be very rewarding. In Brazil and Mexico, for instance, local currency bonds are yielding 10% and 7%, respectively. Other countries with solid local currency debt are South Africa, India, and Indonesia.
FINSUM: So there seem to be two big risks here. One is the exchange rate risk, and the other is credit risk. That said, these yields do seem to be rewarding, and worthwhile if they are a small part of a portfolio.
Emerging markets had a very poor first half to the year, with equities entering into a bear market and bonds suffering losses too. However, in recent weeks, bonds have started to rally, which has made some hopeful a big rebound is on the way. That said, American fund managers are not rushing back in, saying that the bonds are very risky. In fact, a survey by Citi found that even though prices are rising, top EM bond fund managers are getting bearish and are setting aside more cash in anticipation of losses.
FINSUM: Dollar-denominated bonds from the likes of Argentina, Egypt, and Brazil have their appeal—high yields, but they do hold a lot of risk, especially in a period of rising rates and a rising Dollar.
(Rio de Janeiro)
Emerging markets have been in a really tough patch lately and generally entered a bear market recently. Their losses have been urged on by higher rates and a stronger Dollar. However, the situation may be about to turn around. The argument is from UBS Asset Management, who says that EMs have de-risked from five years ago during the Taper Tantrum, and that they are in a much stronger financial position now. In particular, whereas investors were worried about EM risk during the Taper Tantrum, now the losses have just been down to a rising Dollar, which does not signal any fundamental weakness.
FINSUM: Our worry with this argument is the lack of a catalyst. While all of what UBS argues may be true, what will cause the market to comprehensively reverse?