Investors who had been betting on emerging markets stocks might want to take notice of what is happening in the Treasuries market. While the explanation is a little technical, hear this: since the US deficit is set to rise rapidly, the US will see a surge in Treasury issuance. That big jump is issuance will suck up investor Dollars, and is likely to greatly wound Dollar-based EM funding. The Fed will also be forced to stop shrinking its balance sheet, which will also exacerbate the situation for EMs.
FINSUM: It sounds like the EM funding market is going to take a hit, which could have major ripple effects throughout the whole asset class.
Something monumental, and very troubling, happened in China his week. The central committee there recommended scrapping the two-term limit for leaders, meaning Xi Jinping will stay in power indefinitely. This has “has put us back 30 years”, said one Chinese commentator close to the situation. One Australian academic comments that “We’ve had so many steps backwards [under Xi] … Media controls have become stricter, internet controls have become stricter. And now one of the few seemingly effective checks on a senior leader’s power — that he can only be in power for two terms — is now just being completely cast aside”.
FINSUM: Even for a country with no elections this seems quite authoritarian. We don’t suspect any immediate fallout, but this could be a slow-building drama.
For those who aren’t aware, there have been some major sweeping changes in Saudi Arabia over the last few days. In a broad move to consolidate power, The Saudi Arabian king’s son has had dozens of princes throughout the country arrested. The arrests are being done as part of an anti-corruption drive by Prince Mohammed, but they are raising international eyebrows about the business climate in the country, especially as Prince Mohammed has said he will bring great reform. The big flurry of arrests also come just prior to the IPO of state oil company Saudi Aramco, and many think these moves will accelerate the outflows from Saudi assets which have already been occurring.
FINSUM: This seems like a very counterintuitive move from a prince who says he wants to reform the country and transition it away from reliance on the oil sector. Saudi Aramco just took a huge valuation hit.
The bull run in US stocks is getting long in the tooth by any standard. While stocks are still very strong, valuations are high and fears over a correction or bear market abound. However, the bull market in emerging markets looks like it is just beginning. Bank of America thinks that emerging market stocks may double in the next two years as this current run looks similar to previous ones. EM stocks have risen 60% since early 2016, but many fear the tensions in North Korea could end the run. On the contrary, Bank of America thinks prices will keep moving higher and will only eventually be derailed by recession or overvaluation.
FINSUM:Emerging markets did not have nearly the gains that US stocks had over the last five years or so and now might be their time to break out.
Venezuela has been in a state of protest and disarray for the last couple of years. Chaos may be a more appropriate term. However, this article argues a much scarier new term is emerging: civil war. The country has suffered from inflation and a lack of basic goods, which have spawned increasingly intense protests from those demonstrating against Maduro’s government. Now things have worsened to the point where an all-out civil war may emerge. “We’re seeing much larger masses protesting across all major cities, including the working-class neighborhoods” where Maduro used to enjoy support, says a retired Venezuelan general formerly in charge of putting down such unrest. “The government is losing control”, he continued.
FINSUM: It is hard to discern what impact this may have on the US political and investment climate. It does seem the US would be more inclined/obligated to get involved given the closer proximity of the country. The oil market would probably gain on the prospect of decreased supply from Venezuela.
Source: Wall Street Journal
Most investors will be relatively happy with the way US markets have performed over the last few months. However, this piece points out that the really big gains of 2017 have been in emerging markets. As a whole, developed market equities have returned just half the 12.4% that emerging market equities have offered so far this year. The returns are great in bonds too as a basket of emerging market bonds has risen 7.4%, triple the global benchmark. Emerging stocks looks cheap right now as the MSCI Emerging Markets Index trades at 12.3x earnings compared to 16.6x in developed markets.
FINSUM: It looks like there are some very good opportunities out there in the emerging world, but beware of the currency risk and governance issues that one faces once they get into emerging market stocks.