The Opportunity You can Grab from Emerging Markets during the Era of U.S – China Trade War
The most unprecedented trade war between the United States of America and China marks the beginning of a new age warfare. From 6th July onwards, the U.S government is imposing tariff on $34 billion worth of Chinese goods.
As the tariff war begins China has also retaliated and imposed its own set of levies but of smaller size and intensity. Earlier the unwilling China declared that they won’t step into the war first but would definitely retaliate if U.S. makes advance. China has threatened to impose 10 percent tariff on $200Bn worth of trade. For China, Washington’s threats were kind of “typical bullying”. They call it a “fight between unilateralism and multilateralism”.
The major alibi of Trump administration behind setting of tariff war is discarding its huge trade deficit with China. The U.S. is China’s largest trading partner. The former wants abolition of unequal tariffs imposed on their exports to China. Tariffs are targeted at penalizing China for their arm-twisting foreign business policies. Other countries have to hand over technology to Chinese firms in lieu of access to the Chinese market.
In between the clash of titans, it is the Emerging Markets (EMs) which is feeling the real heat along with its European counterparts. Dollar has registered strong gains against tumbling EM currencies. The gaining Dollar and strong U.S. economy has forced the local currency denominated debt go to into a downward spiral and sending interest rates spike.
Much followed Emerging Markets’ local currencies denominated bond index has lost almost 12% since mid-April. The global investors, who are particularly based in the U.S. are withdrawing their investments back from the E.Ms as their currencies are waning fast. Stronger dollar and fed rate hike have escalated the funding cost of EM entities.
According to EPFR (Emerging Portfolio Fund Research) the equity mutual funds and ETFs of Western Europe lost $2.9 billion in the week ending 4th of July, 2018. The total cash withdrawn by investors in the last 17 weeks amounts to whopping $45 billion. Comparing the situation with brexit turmoil in 2016, due to the uncertainty caused by UK’s decision to leave Eurozone, the tension was much lesser as investors withdrew a smaller amount of cash, totaling just $8.9 billion from market.
The Aftermath of Trade War
According to the experts, U.S. is going to win the war as they are the biggest importer and China needs U.S. China may be going to lose their GDP.
The decision has created ripples in the entire supply chain economy. The exceeding tariffs are pressing businesses to find alternate markets for importing and exporting goods in both U.S.A and China. It has created an upheaval in the global economy and the worst hit countries are Argentina and Turkey.
The central banks of EMs are forced to hike local interest rates to fight inflation, in some cases, like that of Argentina, a sudden spike to as much as 40% to fight local currency from rapidly losing its value.
Loans are expected to get dearer as more than two-thirds of EM debts are dollar dominated.
The Opportunity Lying Underneath
The undue selling of equity mutual funds and ETFs by investors is opening up opportunities for risk takers who are ready to wait for long in order to accumulate big gain. These investors can think of rebalancing their investment. Channelizing the steep returns from small-cap funds to EM ETFs can bring better returns in long. The biggest ETF sell off may be your opportunity to enter EM’s ETF arena.
According to the analysts, big EMs are void of any measurable risk of funding crisis. They have low external-debt-to-GDP ratios and ample FX reserves. Also most EMs are running on current account surpluses.
India’s current account deficit has considerably improved over the years (over $400Bn). India’s dollar denominated debt is in a much comfortable position that of several other EMs in the recent years. Considering how fast India is growing and its structural improvement initiatives may cushion the economy from from going down further.
The panic and uncertainty in the global economy are going down slowly as such situations usually open doors for new opportunities.
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