Why you should have known that emerging markets are dangerous?
Published 4 years ago by BlackDigits
1. QE depressed yields and Hot Money flew to Emerging Markets - since Emerging Markets paid better rates. Now the momentum of QE is decreasing and the reverse is starting to happen. This is putting and will put enormous pressure on currencies of emerging markets
2. The interest rates were lower than inflation in some Emerging Markets - that means that locals generate real negative returns by being invested in their local currency. This also puts a lot of pressure on the emerging market's currency - see more about this here - http://www.economist.com/blogs/freeexchange/2014/01/emerging-markets-sell
3. Complacency and loose lending in Emerging Markets have surely financed an asset bubble. This hasn't unraveled yet but it will for sure. See the article we wrote on China in this respect - http://www.blackdigits.com.mt/articles/read/17/why-does-a-7-5-growth-rate-in-china-mean-bad-news
Beware - this is the start of something bigger. This is not an opportunity to buy at a relatively cheaper price. We are avoiding these asset classes:
- Assets denominated in emerging market currencies
- Assets situated or companies operating in Emerging Markets
- Companies that thrived on Emerging Market growth after the crisis (e.g. consumer product companies increasing their profitability by selling more products in China and other Emerging Markets).
We're not saying to avoid these asset classes forever, but not a minor correction is on the cards.