Wednesday, January 13, 2016

Emerging Market Malise

There has been a media divide in the last decade over who is considered to be in the emerging market category. The BRICS(Brazil, Russia, India, China, South Africa) were all members of that global family, although I never saw Russia as an emerging market nation. They are leaders in many categories and not just oil, but they still get slighted due to the Cold War.
No, today it is comprised of third tier trading nations like Thailand, Viet Nam, Chile and so forth.
I guess from time-to-time nations like Libya were in this grouping as well as other examples, except social change has also caused economic woe. In fact, one could make an argument that the Arab Spring, now in the forefront of social change, will cause tumultuous economic change both in the nation of origin and the European nations where the refugees finally settle. Nevertheless, this piece is directed toward the present make-up of the third tier group as well as the BRIC nation's since the global market is interconnected. A ripple off one coast could become a tsunami when it crosses the ocean to another shore.
US Bond's
were issued in mass by the emerging market community. Governments and corporations took advantage of cheap money created by the US Fed. They knew the US market was safe and secure. This money funded government programs and allowed corporations to expand their capacity to grab market share. The timing was excellent from 2010 until 2015. Then, the slowdown in China and Europe ricocheted back to their border like a boomerang as Australia is a prime example. In addition, the period marked the introduction of QE in EU. Japan devalued along with China. The market devalued Brazil, India, South Africa, Russia along with almost every world nation. This is the central point of contention. The money raised by issuing bonds must be repaid and repaid in dollars. The problem for emerging nation's is that the devaluation of their currency makes this payment of the bonds more costly. The dollar rise also sent inflation around the world. Imports cause more and eventually people buy less to evade inflation. As a result governments cut back on programs and future plans as they struggle to meet the obligation of the bonds. Argentina is the poster child for failure to repay. The next step along those lines is Zimbabwe. Only a fool would follow that path.
Declining Oil
has not helped that much because again, oil is priced in dollars and since currencies are lower, this almost becomes a wash. There has been some help with lower prices, but then again, many of this group gets its revenues from oil. The International Energy Agency(IEA) says oil reserves are at 3 billion which is an all-time high. This is not good for the price of oil or nations who export oil for revenues. The OPEC leader, Saudi Arabia is pumping oil like crazy to discombobulate the US shale industry. This action is not going over so well with the other members of OPEC. Some world exporters like Libya has seen their production decline, but soon, sanctions to Iran will end and even more oil will be available. Speaking of sanctions, the one placed on Russia not only hurt Russia, but world trade which declined in 2015.
The iShares MSCI Emerging Market Index(EEM) plunged another 1.9% and is down 4.4% for the first week of 2016. It has returned to the 2009 level which is a valuation below the level at which these nation's first issued the bond's back in 2010. This could also cause another crisis because insurance on these bonds or derivatives will alarm the world markets because written contracts call for certain evaluation levels to be current. I have no idea how bad that can be or the bond's issued could be called and rolled over, but whatever happens, it can't be good.