Demographics, subdued inflation, and above all super-low interest rates have caused all sorts of changes to what used to be considered ‘normal’ market conditions. Unsurprisingly, almost free money means that lots have piled on the debt. Late last month deputy PM and the Treasurer of Papua New Guinea said the country was in advanced stages of issuing the country’s first sovereign bond; an issue of $500m to $1bn is expected this month.
All well and good, but we’ve become aware this year of the dangers in emerging markets where liabilities are in hard currency and must be serviced by local currency exports. Centre-stage with this problem is Turkey, where in January 3.73 Turkish lira would buy a US dollar, to peak this summer at 7.21. Note, though, that currency weakness this year is also a problem for some developed countries: against the US dollar the Australian dollar, Hungarian forint and Swedish krona are off by 10 per cent, kiwi and Polish zloty about 8 per cent.
Buying assets is one way of hedging against currency devaluation, hence middle class Venezuelans desperately clinging on to their apartments. It also means buying into companies, usually via shares, because all things being equal, their value will increase by as much as the exchange rate falls. The FTSE 100 is a good example of this in practice, so much so that some have rebranded it the commodity index.
The Indian rupee is off by 14 per cent this year (against the US and used in all today’s examples). Mumbai’s Sensex index this year has rallied from a low at 32,500 to almost 39,000 – a new record high – equivalent to a 20 per cent gain; net-net that means a US-based investor is up 6 per cent. However, this is not guaranteed and not the case as when things get really ugly; the rats will scuttle off a sinking ship at any cost. Both currency moves and the stock market stalled recently in India, and are likely to hold close to current levels until Christmas – with a little luck and some sensible government policies. Upsetting this apple-cart is quite easy, though.
The South African rand, and the Republic itself, has had a difficult time this year with the enforced resignation of Jacob Zuma ushering in his deputy at the African National Congress, Cyril Ramaphosa, as the nation’s fifth president under the new constitution. The rand has fallen by 20 per cent and the Johannesburg All-Share index has lost 9 per cent. Not a pretty picture, and one where we see currency weakness accelerating and thereby exceeding 2016’s record 17.82 rand per greenback. Despite this, we feel the index is likely to hold around the recent mean regression at 57,250.
Russia’s rouble’s off 22 per cent, the Micex index pretty much unchanged this year; the threat of sanctions should make even the bravest tread extremely warily here.
Brazilian real weakness has already accelerated this year, off by 25 per cent, but has not caused hyperinflation, although not an inconsiderable devaluation. The currency looks set to reach a new record, beyond 2015’s 4.25 to the dollar; maybe as much as another 25 per cent over the next 12 months. As for the Bovespa index, it is also unchanged since January but the chart suggests it should rally up to the record high of 88,300 late this year.
