Emerging markets are continuing to see their financial assets deteriorate. According to the Institute for International Finance, emerging markets once again saw portfolio outflows in November. After rising in October, last month saw total EM stock and bond outflows by non-resident investors of $3.5 bn. The IIF cited increasing confidence over a US interest rate hike this month as a reason for the resumed outflows, after a brief recovery in October following the Fed’s decision to delay rate rises. All regions except Latin America were likely to have seen outflows the IIF said. Interestingly though, despite its brutal recession, Brazil is still seeing inflows.
FINSUM: Emerging markets seemed to have hit a period where they will suffer for a number of years as they deleverage. Investors and analysts have clearly picked up on this, which explains the deterioration of EM assets.
Source: Financial Times
Brazil’s economy is headed nowhere fast, as new GDP data shows the size of the country’s economy dropped a staggering 4.5% from this time last year. Latin America’s largest economy shrank 1.7% in the third quarter, with a 2.1% drop the previous quarter. The shockingly bad numbers have led Goldman to say the country is facing an all out depression. Brazil is facing a huge budget deficit, a partial government shutdown, sky high rates, and double digit inflation. The chief Latin American economist at Goldman Sachs summarized the situation this way, saying “What started as a recession driven by the adjustment needs of an economy that accumulated large macro imbalances is now mutating into an outright economic depression given the deep contraction of domestic demand”.
FINSUM: And one wonders why the BRIC concept has lost its traction! Emerging markets are in the midst of a broad downturn, and Brazil is at the very leading edge of that.
China’s stock markets have recovered strongly from their deep summer plunge. Stocks overall are up 17.7% from their August low, and alongside the recovery, debt markets are starting to look frothy as investors have moved their speculative capital into bonds. Earnings for Chinese companies plunged in the third quarter, which suggests that the stock market recovery and the bond jump are overdone. Companies’ creditworthiness has been tumbling in China, yet financing has been getting ever easier as eager investors buy up new issues, sending interest rates downward. Spreads to Chinese government bonds have been tightening despite the deteriorating credit outlook.
FINSUM: The capital controls in China seem to have a distorting effect on financial assets, as there is a flood of capital that has little place to go even when the macroeconomic backdrop looks weak.
Source: Financial Times
India’s prime minister, Narendra Modi, has forced himself into a very tense issue surrounding the upcoming Paris climate talks. It is hoped that the world’s nations will come to an agreement on containing the global climate this month in Paris, and ahead of that, Modi has declared the developed nations must shoulder the largest burden. Modi says that the developed world built itself on fossil fuel, and thus it would be immoral for those nations not to shoulder the largest burden in containing emissions and climate change. Developed nations on the other hand, think that no deal can be made unless large emerging economies take on a big burden of changing their practices. India is the world’s fourth largest emitter behind China, the US, and EU.
FINSUM: Honestly, given the state of world politics, and the huge politicization of climate change, we think it is very unlikely that countries will agree to a comprehensive accord. In the spirit of many EU deals over the last few years, we expect a symbolic agreement short on details.
Source: Financial Times
For those interested in macroeconomic themes, the Wall Street Journal has run a piece arguing that the long-standing development model of export-led growth is faltering. For over a century the easiest route to wealth for poor nations was to build up strong manufacturing sectors, which created jobs and wealth for workers. However, that model now appears to be broken as “premature deindustrialization” appears to be hitting poorer nations around the world, such as India. Manufacturing’s share of the economy there has fallen from 19% to around 17% since the 1990s, and is contracting despite the fact that it never reached high levels. The same is occurring in other parts of South Asia, Latin America, and Africa. A big part of the issue has been competition with China, which has revolutionized manufacturing. Additionally, trade barriers are falling, which is making it harder for countries to protect their producers. Another forward looking factor is that as the world’s population ages, especially in developed countries, demand for all manner of goods is going to fall, which may continue to wound manufacturing.
FINSUM: This is a very interesting macroeconomic piece that helps understand why EM growth has been, and may stay, quite weak.
Source: Wall Street Journal
Something very curious is occurring in China’s debt markets—they are both booming and busting at the same time. The country experienced its very first default last year, and has this year seen six from across different industries. The outlook for the country’s highly indebted companies is bleak because of slowing economic growth. All of this would usually mean investors would shy away from the market and demand substantial risk premiums, however, the opposite is occurring. Investors are pouring into new corporate bond issues, which is driving interest rates down and making it very easy for companies to sell new bonds. The spread is now narrowing between government and corporate bonds, and as of early November stood around only 1.3%. China is now the world’s third largest bond market, having grown rapidly in recent years.
FINSUM: China’s capital markets have always been a very unusual place, but the mix of capital controls and the summer’s slumping equity markets is probably pushing lots of domestic capital into bonds, despite the risks.