Eq: EMs
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
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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Here is an eye-opener—Chinese stocks have just returned to a bull market. As everyone will know, Chinese stocks tumbled in the summer after a huge run upward in the first half of the year. The volatility seen shocked the world, sparked a major global selloff, and seemed to be a major factor in the Fed holding off on September rate rises. However, despite all this, a sense of calm has returned to the Chinese (and global) markets. Chinese GDP data, which was better than expected, helped allay fears of a “hard landing” for the Asian economy, and further accommodative action by the government was received as good news. The Shanghai Composite was up 10.8% in October and has gained 20% from its late August low.
FINSUM: It remains to be seen how things will play out for the Chinese economy, as despite the better-than-expected figures it is still slowing. However, that may be a moot point as the government-controlled data seems rather fudged.
Source: Financial Times
The renewed hawkishness from the Fed brings to mind the dire straits some emerging markets will be in once the US hikes rates. However, despite the grim outlook, Goldman Sachs says many EM bonds are still a good buy. The bank says that certain EM bonds, such as Eurobonds from developing nations, still look very attractive, as they hold 400 basis points spreads versus US Treasuries, enough to cushion for rate hikes. “The case for looking for yield in emerging markets remains intact”, says Yacov Arnopolin, a Goldman fund manager who helps oversee $36 bn of EM debt.
FINSUM: The bulk of the argument here seems to be based on a view of how spreads will react to tightening, and in what time frame.
Source: Bloomberg
Something very curious is happening in Asia—markets are finishing up their best month in six years. This occurs just a couple months after some extreme volatility, especially in China. Markets have been rising on the hopes of further central bank stimulus. Additionally, worries over a Chinese hard landing have softened in light of a lack of calamity and some solid GDP figures. It is no surprise then that China’s markets are leading the region, with the Shanghai composite seeing an 11% gain over the last month after four straight months of negative performance. The Nikkei in Japan is also seeing robust gains, moving up 9% this month. However, the piece notes that markets have been losing momentum this week, possibly because investors are worried that the scope for further easing is limited.
FINSUM: It seems a sense of calm has settled back into Asian markets. However, if, as the piece says, this is driven by hopes for more central bank stimulus, then the rally might prove very fragile.
Source: Wall Street Journal