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We May Be Facing a Textbook Emerging-Market Crisis

We May Be Facing a Textbook Emerging-Market Crisis

Video commentary for September 3rd 2018

Eoin Treacy's view
A link to today's video commentary is posted in the Subscriber's Area.

We May Be Facing a Textbook Emerging-Market Crisis

This article by Satyajit Das for Bloomberg may be of interest to sUBScribers. Here is a section:

Total emerging-market borrowing increased from $21 trillion (or 145 percent of GDP) in 2007 to $63 trillion (210 percent of GDP) in 2017. Borrowings by non-financial corporations and households have jumped. Since 2007, the foreign-currency debt – in dollars, euros and yen – of these countries doubled to around $9 trillion. China, India, Indonesia, Malaysia, South Africa, Mexico, Chile, Brazil and some Eastern European countries have foreign-currency debt between 20 percent and 50 percent of GDP.

In all, EM borrowers need to repay or refinance around $1.5 trillion in debt in 2019 and again in 2020. Many are not earning enough to meet these commitments.

Turkey and Argentina have twin deficits (combined budget and current-account gaps as a percentage of GDP) of 8.7 percent and 10.4 percent, respectively, that require financing. Pakistan has a twin deficit well above 10 percent. Brazil, India, Indonesia, South Africa and Ukraine are at or above 5 percent on that basis. In India, if state governments are included the number approaches double figures. Those gauges are rising in China, Malaysia, Mexico, Colombia, Chile and Poland.

Then look at reserve coverage – foreign-exchange holdings divided by 12-month funding needs for the current account, short-term debt maturities and amortization of long-term debt – which measures the capacity to meet immediate foreign-currency obligations. Turkey and Argentina score 0.4 and 0.6 respectively, meaning they can’t cover their needs without new borrowings. Pakistan, Ecuador, Poland, Indonesia, Malaysia and South Africa have reserve coverage of less than 1. Chile, Hungary, Colombia, Mexico and India have coverage of less than 2. Brazil and China come in at 2.5 and 3.1 times, respectively.

Even where reserve coverage appears adequate, caution is warranted. Long-term debt becomes short term with the passage of time or an acceleration event. Forex holdings may not be readily accessible. Much of China’s $3 trillion of reserves is committed to the Belt and Road infrastructure initiative. The ability to turn U.S. Treasury bonds and other foreign assets into cash is limited by liquidity, price and currency effects. Reserve positions are notoriously opaque: In 1997, the Bank of Thailand was found to have grossly overstated available currency holdings

Eoin Treacy's view
Capital is both global and mobile. Quantitative easing programs did not just help to inflate asset prices in the regions the funds originated, but globally. When yields drop in region yield hungry investors are forced to look further afield for returns and emerging markets were a logical choice. That looked like a genius move until the Federal Reserve embarked on quantitative tightening which has reduced the supply of Dollars used to repay that debt. Continues in the Subscriber's Area.

Italy Leaders Whipsaw Markets With Vows of Defiance, Reassurance

This article by Jerrold Colten and Kevin Costelloe for Bloomberg may be of interest to subscribers. Here is a section:

The coalition government’s fiscal plans have been an investor focus all summer, with bond yields pushed higher in response to the coalition government’s expensive election promises. On Friday, Fitch Ratings cited budget concerns as it changed its outlook on Italy to negative from stable -- the overall grade remains two notches above junk.

Salvini said Monday afternoon that the budget would lower taxes and respect “all the rules,” toning down his earlier rhetoric challenging the European Union’s restrictions. The Italian 10-year bond immediately rose, sending yields down about 5 basis points to 3.18 percent. That compares with 2.7 percent on June 1 when the government was sworn in.

Finance Minister Giovanni Tria is fighting to contain public spending and he said in an interview with La Repubblica that bonds will rise further when investors see the details of the 2019 budget.

“Budget stability will be respected,” he said. Tria, an economics professor drafted at a late stage of the coalition negotiations, is trying to rein in the ambitions of Salvini and Luigi Di Maio of the anti-establishment Five Star Movement, though he lacks the political muscle of the two populist party leaders. The government is due to set new public- finance and economic-growth targets by Sept. 27 and submit a draft budget to the European Commission by Oct. 15.

Eoin Treacy's view
I can’t help but think of the exchanges going on in Italy between the leaders of the two populist parties and their finance minister as the equivalent of a British Christmas pantomime. “Oh yes, we will” to which the only riposte is “oh no you won’t.” Continues in the Subscriber's Area.

Stock Rally in India Faces Hurdles Despite World-Beating Growth

This article by Ravil Shirodkar and Nupur Acharya for Bloomberg may be of interest to subscribers. Here is a section:

About three-fourths of 50 Nifty members reported results that either beat or met earnings estimates in the June quarter, the highest proportion in at least three quarters, according to calculations by Bloomberg Quint. The “upcycle could be quite significant, a contrast to most parts of the world” as the share of corporate profits in India’s GDP is close to all-time lows, according to Morgan Stanley. For now, the rally has outpaced the outlook for profit growth, with UBS saying consensus earnings for Nifty are likely to be cut 7-8 percent.

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While Indian equities have traditionally traded at a premium to Asian peers because of the nation’s potential for faster economic growth, the valuation gap between MSCI India Index and MSCI Emerging Markets Index has widened to the highest in a decade, Citigroup Inc. said in an Aug. 20 note. Global uncertainties and rich valuations before a general election next year are “enough reasons to be cautious in equities,” the bank said.

Eoin Treacy's view
India is a high growth market with a well-established domestic consumer market and is in the middle of a digital revolution following the rollout of 4G mobile internet. However, that does not mean it is immune from the occasional bout of volatility. Continues in the Subscriber's Area.

Long-term themes review August 15th 2018

Eoin Treacy's view
FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.
The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.
Let me first set up the background; I believe we are in a secular bull market that will not peak for at least another decade and potentially twice that. However, it also worth considering that secular bull markets are occasionally punctuated by recessions and medium-term corrections which generally represent buying opportunities. Continues in the Subscriber's Area.

The 49th year of The Chart Seminar

Eoin Treacy's view

The next Chart Seminar will be held on 12 and 13 November 2018 at The Army and Navy Club in London.

If you have an interest in attending an online Chart Seminar please contact Sarah and we will arrange times based on the time zones of those who wish to attend.

I am also in initial discussions with a potential partner about organising a New York Seminar.

If you would like to attend or have a suggestion for another venue please feel to reach out to Sarah at [email protected] 

The full rate for The Chart Seminar is £1799 + VAT. (Please note US, Australian and Asian delegates, as non EU residents are not liable for VAT). Subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates. Continues in the Subscriber's Area.

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