Eq: EMs

(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

(Rio de Janeiro)

This article cleverly says “lower for longer morphs into forever” when describing western rates. We think that hits the nail on the head, and explains why emerging markets are seeing huge bond inflows. This Financial Times article says that “pension funds, sovereign wealth funds and other big institutions” are following “more seasoned specialists” into riskier assets as part of a hunt for yield. “This is capitulation … The big, big investors are starting to move”, say an EM portfolio manager at BlackRock. Fixed income exchange-traded funds are the big winners, seeing $8.3 bn of inflows this year, more than 2.5x the volume at the same time last year.

FINSUM: We said that the trouble in Europe might send capital into EMs as they are the only yield game left. That appears like it may be starting to happen.  

Source: Financial Times

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