Storm brews in emerging markets as investors pull cash out
Foreign investors have begun to pull cash out of emerging markets as they begin to look less attractive when compared to the rising return from holding onto “safe-haven” US Treasuries.
Will rising bond yields sink the emerging market rally? The MSCI Emerging Markets index soared by 90% between last March and 17 February as optimistic investors bet on a strong global upswing this year. Yet higher US Treasury yields are proving a party pooper, sending the index tumbling 9% since then.
Foreign investors have begun to pull cash out of emerging markets for the first time since October 2020, says Jonathan Wheatley in the Financial Times. The higher yields on offer in emerging markets look less attractive when investors can receive a decent return from holding onto “safe-haven” US Treasuries.
Another reason emerging markets are so sensitive to US bond yields is that many businesses in emerging economies borrow in greenbacks, so higher US yields make their debt costs rise. By the same logic, emerging economies also tend to do better when the dollar is weak. Yet the US currency has so far “confounded expectations” that it would fall this year, says Paul Davies in The Wall Street Journal. It has rallied by almost 2% against other major currencies.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The jump in Treasury yields is bringing back uncomfortable memories of the 2013 “taper tantrum”, says Craig Mellow in Barron’s. On that occasion yields spiked after Fed chair Ben Bernanke “merely” suggested that he might cut back on quantitative easing (buying bonds with printed money). Emerging market stocks went on to lose “15% in a month”. In 2018, when the Fed hiked interest rates, emerging markets fell by 8%.
Better prepared?
Emerging markets are less vulnerable to a US yield spike today, says Vincent Tsui of Gavekal Research. In 2013 many had large trade deficits, high inflation and overvalued currencies. That left them vulnerable when their borrowing costs suddenly spiked. Yet none of those conditions remain this time. However, says The Economist, Covid-19 has “dramatically widened another kind of deficit: the gap between government spending and revenues”. Brazil’s budget deficit ballooned to 14% of GDP last year. Today the key worry in emerging economies is worsening “fiscal sustainability”, which leaves governments vulnerable to more expensive borrowing costs. Strategists at HSBC say that Brazil, Indonesia, Mexico and South Africa look particularly vulnerable.
Don’t be discouraged by “short-term blips”, says James Crux in Shares magazine. From “under-owned and underappreciated” Latin American businesses to Mexico and Vietnam (see page 26), which should both benefit from supply-chain diversification, there is plenty of opportunity in emerging economies. Investors should keep their eyes on a “much longer-term prize”.
-
Coventry Building Society bids £780m for Co-operative Bank - what could it mean for customers?
Coventry Building Society has put in an offer of £780 million to buy Co-operative Bank. When will the potential deal happen and what could it mean for customers?
By Vaishali Varu Published
-
Review: Three magnificent Beachcomber resorts in Mauritius
MoneyWeek Travel Ruth Emery explores the Indian Ocean island from Beachcomber resorts Shandrani, Trou aux Biches and Paradis
By Ruth Emery Published
-
The industry at the heart of global technology
The semiconductor industry powers key trends such as artificial intelligence, says Rupert Hargreaves
By Rupert Hargreaves Published
-
Three emerging Asian markets to invest in
Professional investor Chetan Sehgal of Templeton Emerging Markets Investment Trust tells us where he’d put his money
By Chetan Sehgal Published
-
What to consider before investing in small-cap indexes
Small-cap index trackers show why your choice of benchmark can make a large difference to long-term returns
By Cris Sholto Heaton Published
-
Why space investments are the way to go for investors
Space investments will change our world beyond recognition, UK investors should take note
By Merryn Somerset Webb Published
-
Time to tap into Africa’s mobile money boom
Favourable demographics have put Africa on the path to growth when it comes to mobile money and digital banking
By Rupert Hargreaves Published
-
M&S is back in fashion: but how long can this success last?
M&S has exceeded expectations in the past few years, but can it keep up the momentum?
By Rupert Hargreaves Published
-
The end of China’s boom
Like the US, China too got fat on fake money. Now, China's doom is not far away.
By Bill Bonner Published
-
Magic mushrooms — an investment boom or doom?
Investing in these promising medical developments might see you embark on the trip of a lifetime.
By Bruce Packard Published