Developing nations began this year by selling almost $41 billion in bonds, with their equity markets riding the wave. (See “Emerging Nations Raise $40 Billion in Bonds This Year,” 17 Jan 2023.)
Now that wave seems to be crashing on the rocks of higher U.S. interest rates.
JPMorgan’s index of emerging market bond issues has slid 1.3 percent this month; MSCI’s basket of stocks in developing nations is off 1.6 percent.
A strong U.S. jobs report in January, followed by news of continuing pressure on prices last month, has rekindled investors’ fears that the U.S. Federal Reserve will continue to jack up its key interest rate beyond the 5-percent peak markets had priced in.
Higher interest rates drive investors toward safe stores of value. Emerging markets are anything but safe, as we have reported in “Emerging Markets Diving Into Debt Default” (12 Jul 2022) and “Dollar Wreaking Havoc in Emerging Markets” (4 Oct 2022), among other articles.
Rising interest rates also strengthen the dollar, making developing countries’ imports for oil, food, and other staples more expensive.
Higher rates also make it harder for those countries to afford interest payments on bonds or to make investments in their economies that might strengthen stock prices.
Low-income nations’ incomes often depend on exporting raw materials, which has made those countries disproportionately dependent on China in recent years. As China’s economy boomed, the nation gobbled imports of minerals, timber, grains, and other goods.
Although China is recovering from its latest COVID surge, it remains mired in a real estate crisis, a weak consumer economy, and its factories are seeing fewer orders for export, as we reported in “China’s Domestic Economy Rebounds, We’re #1?” (14 Feb 2023).
Most forecasters see China’s economy growing by less than 5 percent this year, another disappointment for emerging nations and a warning for investors.
TREND FORECAST: Emerging nations will remain a speculative or short-term investment play as long as inflation remains above 2 percent.
Current high food prices and rising interest rates also increase the chances that those nations will fall prey to social unrest, radical political movements, and populist or socialist governments.
As Gerald Celente often says, “When people lose everything and have nothing left to lose, they lose it.” And since we forecast a steep economic decline, our Top Trend for 2020, “New World Disorder” will escalate as people take to the streets to protest lack of basic living standards, government corruption, crime and violence.
It will also escalate the refugee trend which in turn will also support anti-immigration, anti-establishment populist movements in nations where refugees seek safe havens.