Stormy Waters in Emerging Markets

 

Stormy waters are putting on hold the two-year bull market in emerging market equities, leading cautious investors back to port.

Emerging market securities – both stocks and bonds – are relatively risky assets that attract investors when the global economic scene is benign and potential returns for investments are better in international markets than in the United States. This has been the case for the past two years, and, as usually happens during these periods, the U.S. dollar has weakened, serving to further enhance returns outside the U.S.

The recent break-out of the dollar after a 3-month consolidation, points to an important change in the trend.  Yield-chasing investors have started moving back to safety, abandoning “carry trade” currencies that were attractive for the past several years because high interest rates were enhanced by appreciating currencies. The major “carry trade” currencies – Indonesia, Turkey, Brazil, Argentina – have all seen their stocks, bonds and currencies trashed in recent weeks.

The move in the dollar is probably related to an incipient deterioration in the global economic environment. The market narrative since late last year was of a strong “global synchronous recovery,” but signs of slowdowns in Europe, China, Japan and Brazil have thrown some cold water on this.    Very contentious and possibly calamitous upcoming elections in Brazil and Mexico are also cause for concern.

However, the most important development is the dramatic attack on global trade being carried out by President Trump. The anti-trade zealots in the U.S. Administration, who now have the upper hand in the White House, stepped-up their hostile stance towards China in this week’s meetings in Beijing. At the same time, Washington has started a full-scale war against Chinese tech companies, Huawei and ZTE. Also, hopes of reaching a NAFTA settlement before the Mexican elections are fading, as the U.S. insists on industry-by-industry micro-management.

The intransigent, “take it or leave it attitude” of U.S. negotiators is causing enormous ill-will with America’s allies and major trading partners. The imposition of steel and aluminum quotas on Brazil last week stunned Brazilian negotiators. The spokesman for Brazil’s aluminum firms, Milton Rego, described U.S. tactics as “Al Capone-like,” and added: “You get better results by pointing a gun to the head.”

On the positive side, emerging markets are still well positioned in terms of very low valuations relative to the U.S. and the recovery in commodity prices. Oil prices, in particular, continue their rising trend. Increasing investments in oil producing countries and reducing positions in oil importers may be one of the few attractive trades in these turbulent waters, but in general it is probably best to stay closer to shore.

Fed Watch:

  • The rising USD and EM (WSJ)

India Watch:

  • Stock fever grips India retail  (WSJ)
  • Ray Dalio is bullish on India (IB Times)
  • The strategic importance of India’s rise (CSIS)

China Watch:

  • JPMorgan on MSCI A share inclusion (SCMP)
  • Korean cosmetics lose their edge in China (WIC)
  • Samsung’s sales collapse in China (WIC)
  • Thoughts from China’s elites (FT)

China Technology Watch:

  • China’s response to US on tech (Axios)
  • DJI is shaking up China private equity (WIC)
  • China installed 10 GW of solar in Q1 (Tech Review)

Technolgy Watch

  • Taiwan is falling behind Korea (SCMP)

EM Investor Watch

Investor Watch: