Eq: EMs


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

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