Eq: EMs

(Rio de Janeiro)

For those interested in emerging markets, or worried about how they might be affected by rate rises, here is a good piece. The article says that by one measure, emerging market equity valuations are now at their lowest level ever. In another shocking stat, emerging market stocks have returned -2.1% since the start of 2010, while developed markets have returned 69.1%. However, despite this seeming to be a strong signal to buy EM stocks, analysts say they still aren’t cheap enough. One analyst from JP Morgan summed it up this way, saying “the latest leg of correction leaves emerging markets as the unambiguously cheap segment of global equity on a fundamental basis [but], with the exception of Russia, valuations simply haven’t become cheap enough”. By the end of September the MSCI Emerging Markets Index fell to just 12.8x ten-year average earnings, lower that at the bottom of the 1997-1998 Asian financial crises.

FINSUM: Emerging markets do look cheap, but based on economic fundamentals, it seems they may still have further to fall before they turn around.

Source: Financial Times

(Rio de Janeiro)

The Financial Times has published a wide-ranging and in-depth article which looks at the way in which emerging markets have gained, and may now lose, from ultra-low interest rates. The piece explains that an extraordinary amount of capital—to the tune of $7 tn—has flowed into emerging markets since the Fed began QE in 2008. During that time, emerging markets have gorged on debt to the point where private sector debt is greater on a percentage-of-GDP-basis than in developed markets immediately prior to the Financial Crisis. And now that the Fed has turned off QE, companies across emerging markets, including in China and Brazil, are now having trouble paying their debts. It also makes the interesting point that huge levels of access to capital may have created massive amounts of debt that are hard to detect until they burst.

FINSUM: We are unsure how rate rises are going to play out in emerging markets, but it seems that the slower rates elevate the better, as it will give countries time to adjust. A rapid rise seems like it could completely lock up access to credit across EMs, which would certainly cause a strong recession.

Source: Financial Times


For the second time under PM Shinzo Abe’s leadership, Japan has just re-entered recession. The country’s economy shrank 0.8% annualized in the third quarter as corporate investment declined and the nation took a hit from China’s issues. The data show that the PM’s plan, dubbed “Abenomics”, is continuing to have trouble reviving the economy. The data show that this past quarter was the fifth out of 11 in which the nation’s economy has contracted. Two consecutive quarters of contraction are commonly considered a recession.

FINSUM: Japan’s legacy economic issues and proximity to China did it no favours in the third quarter. Abenomics continues to fall flat.

Source: Wall Street Journal

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