Week End Blog – Emerging Market Blues

· by · in FINANCIAL MARKETS, MACRO. ·

It’s not just China anymore! Emerging markets in general have started to dominate the headlines. And while I’m looking really hard for some improvement, the truth is, things still look pretty grim. This week Standard and Poor’s announced that Brazil’s credit rating is junk again. For the hard currency debt that is, not local currency bonds, but still it’s the wrong way in any case. I admit rating agencies are not know for their timeliness.

South Africa is another one of the ‘BRICS’ that has run into trouble. GDP grows at the lowest pace since the financial crisis and business confidence fell to the lowest level in four years. Perhaps some good results at the upcoming Rugby World Cup would help.

At least South Africa is still growing. That’s certainly not the case for Russia. GDP shrunk by almost 5% in Q2 compared to the year before. And given the ongoing pressure on commodity prices, oil prices in particular, things will not get better anytime soon. For next year growth of just 0.5% is expected and even this number could prove to be too optimistic.

No topic on emerging markets is complete without China. In yet another sign that the economy is cooling down, export and import growth came in negative. And, with the latter falling more than the former, uncertainties about China’s domestic consumption have again increased. That said, minor improvements are being reported in some pockets in the economy. The overall picture remains, at least for now, bleak.

Chinese markets are choppy at best. The Shanghai Composite Index gained some ground this week, but the performance is far from convincing. Also, the massive interventions have changed the market’s structure, which makes it even more shaky to invest. This week shocking numbers on Chinese equity trading surfaced, and got too little attention in my opinion. The number of future contracts traded on the CSI 300 Index, containing the 300 biggest A-share companies, dropped from 3.2 million in June to just over 34K now. So trading volume has collapsed by a factor 100. I guess this makes it easier for the government to prop up prices, but this development is far from healthy.

There was some positive news in emerging markets, though. Turkey’s economy beat expectations. GDP growth was the strongest since the first quarter of 2014.

Of course, this silver lining is eclipsed by the performance of the Turkish Lira. It fell more than 20% against the USD just this year. Over the course of the last five years the value of the Turkish Lira has halved.

But the Lira is not alone. Certainly not. Emerging currencies have been at the root of all emerging trouble this year. Just take a look at the graph below. It shows the 15 worst currencies, measured against the USD, since the beginning of this year. They are all down 20% or more, with the Belarusian Ruble taking first place. Also, the number of African and former Soviet countries that are in the top 15 is pretty striking.

For more upbeat news we have to look outside the emerging world. Europe is  good place to start. Eurozone GDP growth was revised upwards for both Q1 and Q2. Interestingly, Draghi and his fellow ECB members lowered the GDP growth forecast at the last ECB meeting on monetary policy. Now, it’s, of course, the ECB’s task to look forward, but I do sense some eagerness to increase QE. For now things don’t look that bad, however.

For Spain, things are looking great. Week after week, Spain reports record macro numbers. This week it was on industrial production, which rose the most in 15 years. With the composite PMI at record high, fast rising house prices, Spain is the European proof that austerity can work.

Finally, there was pretty impressive event this week in Japan. The Nikkei staged the biggest rally since October 2008 , rising a massive 7.7% on Wednesday. True, this happened after a couple of days of heavy underperformance, but still it shows developed is the place to be.

Thank you for reading the Week End Blog! Enjoy your weekend.

 

 

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