Yesterday afternoon we hosted a conference call highlighting our latest thoughts on emerging markets. Watch the replay below.
The key topics of discussion were as follows:
I) Have emerging market financial assets bottomed? Despite a broad-based rebound in EM asset prices throughout the YTD, the belief that many EM asset markets remain at/near trough valuations has some merit. In this presentation we identify and vet potential catalysts for a sustained recovery and/or another material leg down for EM capital and currency markets.
Conclusion: We see further downside at the primary asset class level, as well as elevated risk of material bankruptcy cycles in a number of key emerging market economies.
II) Are the Chinese economy, its banking system and the yuan as vulnerable to collapse as investor consensus believes? Many investors seem to be of the view that China requires a material devaluation of the RMB to stave off banking crisis and/or outright economic collapse. Some investors actually believe each of those outcomes are inevitable. In this presentation, we offer our well-researched thoughts on the viability of these views.
Conclusion: While we remain explicitly and overtly bearish on the Chinese economy and RMB, we believe investor consensus is far too bearish on both. Most of the analysis we’ve seen inappropriately analyzes the Chinese financial sector from the perspective of Western economies; nor does it include the full range of potential outcomes – including a secular bull market in the Chinese currency and Chinese equities.
III) Which countries will outperform from here? The latest refresh of our proprietary EM Crisis Risk Index will offer valuable insights as to which countries investors should overweight and underweight from here.
Conclusion: On the long/overweight side we like Emerging Europe (i.e. Poland, Hungary and Czech Republic), South Korea and Thailand. In terms of short/underweight candidates, we think Latin America (specifically Brazil, Mexico and Colombia), Indonesia and South Africa are most at risk for #PhaseIII of our #EmergingOutflows theme – i.e. a wave of bankruptcy cycles.
CLICK HERE to download the associated slide deck in PDF format (105 slides).
Our top-10 charts from the presentation are as follows:
10: Country-level credit risks:
9: Country-level acute bankruptcy cycle risk:
8: Summary of country-level economic and financial market risks:
7: One (of two) credible bull cases for the Chinese yuan:
6: Why China won’t opt for a sharp devaluation:
5: Is the U.S. Dollar Index (DXY) moving from “net-long consolidation” to “net-short”?:
4: Why the DXY could go down by a third to a half from here over the next 5-10 years:
3: Why the DXY should go up another 20-30% from here over the next 3-5 years:
2: Contextualizing bankruptcy cycle and valuation risks across emerging market economies:
1: Summarizing our outlook for China and the Chinese yuan in one handy image:
Best of luck out there risk managing downturns across these [former] “drivers of global growth”. Funny how things change with last price…