Monday 10 September 2012

GROWTH, DEMOGRAPHICS AND PUBLIC DEBT

The Asset

BEWARE OF THE DANGEROUS EMERGING MARKETS ‘GRAND NARRATIVE’

Mike Riddell

The Asset, September 10, 2012

The emerging markets (EM) ‘grand narrative’ that is constantly churned out is at best misleading and at worst dangerous. The story goes that you should have a large allocation to emerging markets debt because countries like China and India have: much higher GDP growth rates, lower public debt levels, and far superior demographics than developed countries. Further, experts contend that EM debt in these countries yields more than developed country debt, and EM debt is an ‘under-owned’ asset class in investors’ portfolios.

But performance of EM debt has not been driven by the EM grand narrative of stronger GDP growth, superior demographics and low public debt/GDP levels. It is driven primarily by global risk appetite, US treasury yields, and in the case of external debt, the US. dollar.

Evidence of the past half decade suggests that EM debt remains wedded to the ongoing global financial crisis. Local currency debt is particularly exposed to Europe; indeed, Poland, Turkey, Russia and Hungary together form over 35% of the commonly used JPM GBI-EM Global Diversified Composite Index. Meanwhile, the Hungarian forint (HUF) and Polish zloty (PLN) tend to behave as a high beta exposure to the euro.

(...) [articulo aquí]

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