It would be all too easy to explain outflows from emerging markets as the result of a sharp turn on the size of upcoming rate hikes by the Fed, and then to describe them as the scapegoat for a new phase of super dollar supported by the stellar program of Trump for his next 100 days which will begin immediately after the January 20th inauguration.
The truth goes beyond macro and currency evidence and goes beyond the effects and role that political risk has assumed in the last year, in which, if the moves of the Central Banks were taken for granted, the outcomes of crucial political events - such as the entry of the Chinese Yuan into the IMF basket, the British and Italian referendum and the US elections – they were decidedly less so.
We are sorry for the category of pollsters who have fallen into an identity crisis, but 2017 will still see events of enormous significance and political significance on world balances. As we said, portfolio flows seek refuge from these wild variables and therefore the recent events in Brazil, India and Turkey have reduced the appetite especially on certain choices of opportunities on high returns linked to currency risk. Politics and currencies go hand in hand, as we know, and the Superdollar has widened the gap between US and European yields by catalyzing large interests on the American stock markets.
With 2.5-year US Treasuries at XNUMX% many were ready to return to emerging markets but recent events have dissuaded them.
Even if Turkey has reduced its blackmail towards Europe for the issue of migrants in 2016, Istanbul has seen a heavy flight of foreign capital which has led to a clear depreciation of the currency and a drastic reduction in economic growth forecasts . A situation that is far from improving and with Erdogan increasingly isolated from international diplomacy due to the heavy repression of civil rights in a country in a state of emergency and the dramatic initiatives undertaken at the expense of the Kurds inside and outside the territory. It is therefore no wonder that the tragic murder of the Russian ambassador sees Erdogan forced to mend a relationship with an uncomfortable but necessary partner for the survival of the country.
In Brazil, the outflows of investments from bonds appeared evident in the latest balance of payments data, on the other hand, the Brazilian market was the surprise of 2016 in the wake of a liberating impeachment that now leaves room for drastic social measures and tax measures of budgetary downsizing to combat a recession that continues inexorably to undermine the future of a country that has come apart in pieces from the gigantic Lavajato scandal, linked to Petrobras and now with global effects, which is afloat only thanks to a florid trade balance, a contained foreign debt and the recovery of oil prices.
In fact, if the BRICS were to save the emerging market sector and lead a recovery thanks to the abandonment of gold as a safe haven, this will not happen, if not for the exception of Russia which has made the best "economic policy" of political risk.
Among these, India also raises the white flag at the end of this year due to the harmful effects of a demonetization process, launched by Premier Modi as an anti-corruption campaign, which did not take into account that most Indians are not banked and which has seen a collapse in gold purchases due to the urgent need to exchange tickets declared out of circulation from night to morning.
But also the poor performance of the Mexican peso, partly contained by the action of the central bank, and the tensions of the Polish zloty on renewed internal social tensions warn investors of the need to take their own caution before facing an eminent currency risk at the light.
Deregulation and Trump's infrastructure plans, together with the return of capital to the US, have also been the salvation of European markets at the end of the year, refocusing investors on the return of the US as the new locomotive of global growth, but emerging markets are the losers if they do not change their model, making them attractive again for investments and riding on the appreciation of oil expected for 2017.
