Eq: EMs

(Rio de Janeiro)

We don’t cover much about the United Nations here, but the organization has just put out a stern warning that we think warrants the attention of investors. The UN says that emerging markets are going to spark a new financial crisis because of weakening trade, stumbling growth, and capital outflows which will all combine to create a spiral of deflation and debt. The UN says that capital flows into EMs have been driven by QE in developed nations, but that once that QE really ends and interest rates rise, “the third phase of the global financial crisis will come from emerging markets”.

FINSUM: This article comes at a time when few are discussing the potential for a big emerging markets blowup. It does makes sense that if the force (QE) that has been pushing capital into EMs is taken away, that this group of nations could see some big issues.

Source: Financial Times

(Rio de Janeiro)

There is a very familiar script about to playout in emerging markets. Over the past three decades, whenever the Fed hikes rates, money flows out EMs, weakening currencies, and calling into question whether local entities will be able to service their Dollar-based debts. This may be about to occur yet again as US rate hike expectations have been surging across markets. The piece says the key aspect for EMs will be how steep the US yield curve is, as if US rate expectations for 2017 are for a shallow tightening cycle, then long-term rates should stay low—favorable for EM assets.

FINSUM: This seems to simply come down to a yield play. If one could once again get 3-4% yields on US government bonds, there is certainly less incentive to be venturing into EMs.

Source: Bloomberg


Most investors are not aware of it, but the Chinese have begun the bailout of their embattled financial system. Analysts at UBS in China say that banks in the country have been shedding bad loans and have already raised 620 bn yuan in new capital. “Contrary to market perception, bank recapitalisation and bailouts have begun”, says UBS. However, for as many lenders as have undertaken restructuring plans, there are many times more that have not. This leaves UBS unconvinced by the measures being taken, saying “The concern is that if we continue to see credit growth — loan plus shadow loan — at a two to three times multiple of GDP growth, then we believe the positive steps being undertaken to recap[italize] and deal with bad assets could be outpaced by the growth of non-performing loans”.

FINSUM: This seems like a positive step. However, what UBS points out is this may be simply not enough given the level of credit growth in China.

Source: Bloomberg

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