Eq: EMs


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

(Rio de Janeiro)

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.

Source: Bloomberg


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

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