The situation with investments in the assets of developing countries – stocks, bonds and currencies – is similar to what happened in the USA before the mortgage crisis: external well-being and visible benefits mask big problems, writes Bloomberg.
“The bubble of this business cycle is inflating in emerging markets (EM). When the recession comes, the problems will be very serious for them,” David Levy, head of the Center for Economic Forecasting named after him, told the agency.
According to him, the analogy with the collapse of the US mortgage crisis is due to the combination of high returns that investors require from EM assets and the bloated debt burden of their economies.
The risks of investing in emerging markets have shown the events of recent weeks:
- Riots in Chile, the country with the highest country rating in Latin America, brought its pesos down by 1.9%, the stock market by almost 5%.
- Protests in Lebanon raised the yield on government bonds with maturity in 2021 to 24%, default loomed in front of the country
- Investors in Argentina, having experienced a 30% drop in the market and currencies, froze in anticipation of Sunday’s presidential election, which will defeat left-wing politician Alberto Fernandez.
- Protests began in Ecuador (due to the abolition of fuel subsidies) and Bolivia (due to the counting of votes in the presidential election).
At the same time, the volume of the issue of government bonds EM in dollars and euros since the beginning of the year exceeded the entire volume of 2018, and together with corporate borrowings, the volume of new debt ($ 525 billion) was 20% higher than last year.
Frank Dergachev, senior portfolio manager at Union Investment in Frankfurt, says that now investors, trying to really appreciate EM, are trying to look behind the facade of news about politics, demonstrations and sanctions. “But if you ignore them for too long, you can get very burned,” the expert says.
There are quite a few warnings about the problems of emerging markets – from a lowered IMF growth forecast for 2019–2020 and a slowdown in China’s economy to studies showing that EMs are unable to be a driver of the global economy.