Daily Brief: Emerging Markets Look Too Risky A Bet Right Now, And Investors Are Done Exploring Them

Daily Brief: Emerging Markets Look Too Risky A Bet Right Now, And Investors Are Done Exploring Them

about 2 years ago3 mins

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Data out on Thursday showed investors effectively stopped investing in emerging markets (EMs) last month, as they decided some corners of the world probably aren’t worth exploring.

What does this mean?

Foreign investors have a couple of concerns about EMs right now. For one thing, they’re worried the Omicron variant will cause a lot of damage to the regions’ recoveries – especially since they generally have low vaccination rates. And for another, they think EMs are likely to struggle to pay off their mounting debt piles, with repayments only set to get tougher as interest rates rise around the world. So it stands to reason that those investors are making a dash for the exit, with new data showing they sold more EM stocks and bonds (excluding China) in late November than they bought – the first time that’s happened since the pandemic hit.

Foreign slows stop

Why should I care?

The bigger picture: Turkey plays chicken.

EMs' currencies aren't sitting particularly pretty either. Just look at the Turkish lira, which has lost almost half its value relative to the US dollar this year. That’s at least partly because its central bank has been cutting the country's interest rates recently, despite the risk that it'll keep pushing up already-high inflation. That's not exactly good news for international investors who own stocks and bonds in Turkey: they could see all their gains evaporate when they convert them back to their native currencies.

Turkish lira
Source: The Wall Street Journal

Zooming out: Dig up, stupid.

Speaking of unnerving debt piles, Evergrande finally defaulted this week, having failed to make a crucial payment of $83 million to its bondholders on Monday. That’s left the infamous Chinese property developer – which is still more than $300 billion in debt – with two options: either raise cash by selling off some of its prized assets, or take out even more loans to make the payments. What could possibly go wrong?

Evergrande dollar bonds

Keep reading for our next story...

Rolls-Royce Thinks It’ll Save A Lot More Cash Than It Was Expecting This Year

Rolls image

Rolls-Royce said on Thursday it reckons it’ll save a lot more cash than expected this year, and the aerospace giant owes it all to this new employee-lite diet it’s on.

What does this mean?

The world's been hoping to get back to its globetrotting ways this year, but the pandemic’s had other ideas: it's been keeping long-haul flights grounded, and profit from Rolls's aerospace division – which earns more the more miles its engines cover – down there with them. That's been forcing the company to cut costs one way or the other, much to its employees’ dismay: Rolls’s cost-saving strategy included cutting a fifth of its total workforce.

Still, that belt-tightening has been paying off, with the company expecting to go through less cash than it forecasted at the start of the year. Good thing too: Omicron’s poised to cause even more travel chaos next year, so it'll need every penny…

Why should I care?

For markets: Rolls needs consistency.

Investors sent Rolls’s stock down 4% after the news. And sure, that’s partly because they’re on edge about where air travel goes from here, but there’s more at play: Rolls’s power systems segment – which makes engines for yachts and trains – was hit hard last quarter by supply chain issues, not least the chip shortage. Put another way, it’s one thing if Rolls’s aerospace division is flailing right now, but quite another if its other businesses can’t pick up the slack.

Rolls stock
Source: Google Finance

Zooming out: There is a solution here.

Rolls might want to take a leaf out of BMW’s book: the carmaker signed a deal on Wednesday that guarantees it’ll be supplied millions of chips every year. That’s part and parcel of a wider trend, where carmakers are dealing directly with chip manufacturers – rather than traditional parts suppliers – in a bid to avoid a repeat of this year’s production shutdowns.



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