Inflation fears in the United States and Europe are prompting Western banks and funds to search for higher yields in secondary markets in Africa and Asia that have not yet entered emerging market indices. And dollar-denominated issuances in previously unknown markets, such as Tanzania and Uzbekistan, give a return of 9%, and dollar-denominated issues in emerging countries, or so-called “Eurobond” issues, give returns of an average of 5%, according to the US JPMorgan Emerging Markets Index. This ongoing investment trend among financial institutions prompted Bloomberg Agency to expand the emerging market index last Tuesday, and to introduce new markets in the index.
According to the figures, large investors made huge profits during the “Wall Street” market during the past year, and despite the ongoing recovery in the US economy, investors are concerned about the future of US assets and the turmoil that has occurred for months in the dollar exchange rate, which fluctuates rapidly between rise and fall. Accordingly, analysts believe that the indicators of high growth in the US and European recovery are still shrouded in uncertainty about the future monetary policy path, and on the other hand, there are profits that can be reaped from emerging and developing markets.
In this regard, experts at the European “Oak Tree Capital Management” fund say in an analysis of the European “Funds Europe” bulletin issued yesterday, Thursday, that “emerging markets are currently in a good position to withstand any global financial shock like the one that occurred in the second quarter of 2020 due to the financial crisis. The shortage of dollars, it also has the potential for a rapid recovery.” Many emerging economies in the Gulf region, Africa and Latin American countries are benefiting from the cycle of unprecedentedly high prices for oil, natural gas and minerals, as well as from the falling dollar.
Many emerging economies companies buy their goods from China and do more trade with them and with Asian growth countries than they do with America, which reduces the dollar bill.
Investment expert Franc Carroll and expert Janet Wang from the European “Oak Tree Capital Management” fund, in an analysis of the “Funds Europe” bulletin, expected an increase in dollar flows to emerging economies during the current year.
The two experts say that asset prices in major economies have witnessed the largest rise in nearly a year and a half since last April due to the continuous stimulus policies, and that “American financial markets are standing at the “inversion point” at the moment. Retreat amid inflation fears On the other hand, analysts believe that emerging markets are heading towards reaping more export revenues in the coming months due to the weak dollar.
Since the beginning of 2021, many emerging economies have been working to pay off part of their dollar debts and reform their budget schedules, benefiting from the rise in export income and the improvement in the exchange rate of their currencies against the dollar. Western banks’ desire to invest in their sovereign debt is due to the uncertainty about the course of US monetary policy and the repercussions of inflation. These factors encourage major investors to invest in emerging markets.
Bankers noted that the difference in the return on government and private bonds began to widen between emerging markets and developed markets, despite the risks in emerging markets. While the yield on dollar bonds in emerging markets rises above 5%, according to the “JP Morgan” index, the return on assets in the US market does not exceed 1.62% on government bonds for 10 years and is less than that in Europe.
However, investment experts noted that there is a discrepancy in the performance of emerging markets, as while the commodity-exporting economies and metals are benefiting from the post-Corona recovery cycle, the countries of the emerging importing economies are facing great financial troubles and the recovery of their economies may be delayed, and the possibility of changing the course of monetary policy during the year With the return of mature economies to growth at rates before the Corona pandemic, some countries that borrowed heavily in the past year, such as Russia, India, Peru and South Africa, are concerned. Data from the Washington-based Institute of International Finance indicate that the sovereign and private debts of emerging economies in hard currencies witnessed the largest jump over the past year, reaching about $8.6 trillion.
And the former official at the Central Bank of Japan, Nobuo Yasuo Atago, believes that emerging countries that depend on foreign flows to finance current account deficits will suffer from the uneven recovery in the post-pandemic period. He says that “the uneven recovery in the post-Corona period will create crises for many emerging economies.”
Analysts believe that countries such as Brazil, Ghana, Armenia, Indonesia and many developing economies that import primary commodities will face economic difficulties in the event of a tightening in monetary policy and raising US interest rates. Many emerging and developing economies experienced a severe crisis due to the shortage of dollars during the past year.
