Emerging Markets Investment Risks - Will the European debt crisis impact BRIC markets?

The emerging markets decoupling argument is fundamentally flawed. Four factors will limit EM equity upside in 2010.

-Lower growth in China and India due to tightening related to higher inflationary pressures.
-Decelerating growth in the US, EU and Japan. Risk of a double-dip recession in the United States.
-Eurozone sovereign risk contagion will push interest rates and volatility higher.
-Weakening commodities prices due to a strengthening dollar and a slowdown in Asian demand will negatively impact Brazil and Russia.

Decelerating growth in the US during 2H 2010 will drag US GDP and earnings expectations down. EU faces lower growth with sovereign debt and austerity measures of periphery states. ECB has lost any remaining credibility following bailout. Markets will push EURUSD down to parity or below. Japan depends on Chinese exports to fuel growth. Advanced economies private sectors will continue deleveraging process into 2011. EM titans, such as China and India have been the cornerstones of global demand for commodities. Inflationary pressures have mounted so substantially in these countries, however, that growth may cool due to tightening already underway. The decoupling argument cannot hold with US, EU and Japan in a prolonged state of sub-optimal growth AND Chinese tightening coupled with the cessation of commodities stockpiling.

China Its Too Darn Hot

Chinese GDP growth and the subsequent stockpiling of commodities during the 2008-2009 crisis have been two important catalysts for EM equities. For commodities-related equities, there has been confusion between organic, sustainable EM Asian demand vs. (Chinese) government stockpiling. Chinese April CPI +2.8% yoy, increasing risks of rate hikes by end of May. Chinese unlikely to continue commodities purchases this year.

EU Euro Trash

Low Eurozone GDP growth 1% forecast by IMF; periphery will be drag on growth (0%?).

EU sovereign debt contagion risk has not been resolved by the current EU bailout package:

-CDS contracts for the UK and France. While the CDS spreads are below their 5/7 highs, the number of CONTRACTS have increased massively. Is contagion creeping into the EU core?
-Look at 3 month LIBOR0.432% - highest since Q3 2009.
-TED spread not moderatinginterbank risk remains high.

Current fiscal positions of numerous EU states are unsustainable could result in exit by some countries from Euro risk of substantial volatility and flight to safety.

The ST impact will be hot money flowing out of Eurozone, into USD assets again and some EM look at Russian MICEX today. But the net impact will be higher global volatility and an exit from high beta assets should contagion spread.

US Sluggish Growth Ahead

US Economic Recovery U shaped. Q4 growth was 1.9% (excluding the adjustment of inventories). Q1 growth was 1.6% (vs. 3.2% official number)

Q2-Q4 inventory adjustment will end, policy stimulus will wind down, home and car tax credits ending wind will be removed from the sails of the US recovery.

Can private demand, consumption and investment recover to support higher growth? Unlikely. 2% growth average GDP growth rate in 2H in my view likely to continue into 2011 with deleveraging of the private sector.

Massive budget deficit causing political gridlock in DC, which will make a second stimulus package unlikely.

Despite the massive fiscal and monetary loosening, there will be low inflation in the short and medium-term because the money multiplier effect is absent commercial banks are not lending in the real economy, instead, they are buying treasuries and agency debt.

Final Read Through for Emerging Markets

Limited upside for EM equities, along with advanced economy equities for the remainder of 2010. There is substantial downside risk to current GDP growth expectations which will impact current valuations. EU sovereign debt/fiscal problems are far from resolved as expressed by credit markets. Although the Fed will likely ramp up QE as a response, the printing presses cannot run forever and thus the cheap credit funding the current asset bubbles (equities and commodities) will pop.

http://licamele.blogspot.com/

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• Russia
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• market contagion
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[kingwaldo100]

Dont trust the FOS, they are opinion makers and are living on another world.

If you are in debt, go bankrupt. These debt companies are like vultures, if your partner is pregnant leave the country, because there is a very good chance she will not have the baby due to treats,excessive phone calls and harrassment. A corrupt system, banks lie, codes and acts are breached, FSA just watch and dont do anything. A failed system and banks are fully protected.

Ex IFA Director 20 yrs service FSA