Eq: EMs

(Beijing)

Many investors may keep at least a watchful eye on the Chinese economy. While bears have been saying the country was going to see its economy fall apart for years, this article shines some light on the trouble the nation might have moving forward. Chinese wages, on average, are now higher than Brazil, Argentina, and Mexico, and are approaching pay levels in weaker European countries like Greece and Portugal. The wage gains mean that the country has largely started to converge with the West, while many other emerging markets have not.


FINSUM: Its success may be its downfall, as higher wages will not help sustain the huge manufacturing boom that powered the country’s growth. When you combine the logistical advantages of manufacturing in the Americas or Europe with potential wage savings, China’s competitive advantages seemingly disappear.

Source: Financial Times

(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

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