This week will go a long way to determining whether a violent emerging market shake-out turns into a prolonged panic or is limited to a flight of hot money that quickly fizzles out.
from Global Investing:
Are Mr and Mrs Watanabe preparing to return to emerging markets in a big way?
Mom and pop Japanese investors, collectively been dubbed the Watanabes, last month snapped up a large volume of uridashi bonds (bonds in foreign currencies marketed to small-time Japanese investors), and sales of Brazilian real uridashi rose last month to the highest since July 2010, Barclays analysts say, citing official data.
It may be too early to herald a revival of Latin America’s manufacturing following a recent currency decline, according to a report by London-based research firm Capital Economics.
The outlook for emerging market economies over the next decade looks more challenging as long-term interest rates start to bottom out in the United States. Here is another complicating factor: ageing populations.
Traumatized by several currency crises in the past, Brazil has made a dedicated effort in recent years to amass $374 billion in foreign reserves as China bought mountains of its iron ore and soybeans. When the next crisis came, policymakers figured, the reserves would act as Brazil’s first line of defense.
Brazilian economic policy is fast becoming a shining example of the law of unintended consequences. As activity fades and inflation picks up, the government has tried several different measures to fix the economy – and almost every time, it ended up creating surprise side-effects that made matters worse. Controls on gasoline prices tamed inflation, but opened a hole in the trade balance. Efforts to reduce electricity fares ended up curbing, not boosting, investment plans.
After bad economic news from Germany, China and the United States over the past few weeks, here are two more. Brazil and India, two of the world’s largest emerging economies, are increasingly vulnerable to another crisis or to the eventual end of the ultra-loose monetary policies in developed economies after five years of a severe global slowdown.
Brazil inflation jumped above expectations in February, despite a steep cut in electricity rates. It was not the first time, though; inflation has been running higher than consensus forecasts since July, considering the market view one month before the data release: