EM prognosis:  Deeper recession, meagre financial flows

“Insanity is to repeat the same action expecting different results”, said Einstein, or perhaps it was Bernstein.  The love affair of the investment banking strategists with EM asset class, would have made Einstein shake his head from side to side, muttering “I told you so!”  The knee-jerk reaction that a weak dollar coupled with endless flows of liquidity is good for EM assets has become genetically entrenched in the minds of strategists, who rarely bother to do their homework about the economic and political fundamentals of Developing Nations.

 

The fact of the matter is, contrary to accepted wisdom, even including China, Developing Nations will emerge from the battle with Covid-19 with deep and permanent scars.   It is true that EM assets are cheap, but  for a very good reason:  The economies underwriting them sucks!

 

Smart fund managers are investing rapidly into EM, do you what they are buying?  Troubled debt! Let’s hear  out Financial Times:

 

“As the Covid-19 pandemic continues to strike countries around the world, hedge funds are preparing for a host of debt restructurings in emerging economies.

With a stake effectively big enough to block Zambia’s plans, the funds are set up for a lengthy fight. Similar wrangles lie ahead. Debt deals in Ecuador and Argentina this year are likely to be the first among many, as the economic damage from coronavirus starts to expose countries that took on too much borrowing.

For these nations, the restructurings are painful. But hedge funds are seeking trading opportunities.

Some managers have also spotted opportunities in EM equities. Interest in EMs, led by the Bric countries — Brazil, Russia, India and China — soared in the mid-noughties. But as the US stock market’s decade-long rally took hold after the financial crisis, interest waned. Since the start of 2011, EM-focused hedge funds were hit by net outflows in seven out of nine years, according to data group eVestment. But this year, funds have received a net $3.4bn in flows, even as investors have pulled money out of hedge funds overall”.

 

While supra-nationals and heavily staffed and overpaid research departments  in global investment banks herald a “V” shaped in recovery in Developing Nations, International Institute of Finance seems to be one of the few voices out there in the wilderness crying out a truth, that no-one seems to hear:  “Give up all hope, ye mortals”

 

Emerging markets are in line for a slow, uneven recovery and patchy capital inflows, with developing economies outside China and India on track for a deeper recession than in the wake of the global financial crisis, the IIF said in a Wednesday report.

 

The global effects of the absence of China’s 2009 massive infrastructure push and India replacing a strong expansion with a steep contraction both account for this recession being deeper than the one in 2009, the Institute of International Finance said.

 

“China is not repeating its very large infrastructure stimulus of 2009, which means that global activity and commodity prices are not getting the lift they did in the wake of the global financial crisis,” the IIF said.

 

The Chinese economy grew at a 9.4% rate in 2009 and IIF estimates it will expand by just 2.2% this year. India, expected to contract 11.3% this year, posted an 8.5% growth rate in 2009.

 

The report notes that non-resident flows to emerging markets have been much weaker this year than in 2009 despite the “unprecedented” amount of quantitative easing, with Latin America hit especially hard not only by the pandemic but by Venezuela’s and Argentina’s idiosyncrasies.

 

Further hurting the commodity-dependent region, China’s sub-par growth has also kept a lid on prices of basic materials.

The upcoming U.S. presidential election adds to the uneven quality of flows to EM, as the threat of sanctions rears its head.

“In the near term, risks are more pronounced for Russia, but sanctions are likely to play an increasingly important role in US-China relations,” the IIF report said.

“We expect additional sanctions on Russia to remain on the political agenda.”

 

 

 

IIF probably thinks Turkey has diminished herself to insignificance and irrelevance but she, ought to be counted , among economies which shall enter an excruciating recession this winter, as currency instability, interest rates now being raised daily and deep distrust in the Erdogan administration’s ability with the twin enemies of economic stagnation and raging Covid-19 epidemic, destroy  private spending.

 

I’d rather invest in low-yielding US government bonds than bet my hard-earned savings on governments which have no clue about what to do with their economies.

 

Damien H. Grande

 

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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.