The emerging markets crisis has been rumbling on for months, dragging in more and more countries. Venezuela, Argentina, Turkey, South Africa, Brazil… the list is growing, as are concerns they could collapse like a house of cards.
Brexit has also been rumbling on since the beginning of time, or at least that’s how it feels. Ironically, bad news on the emerging markets front, and good news on Brexit, could both have the effect of depressing the FTSE 100, handing investors a massive buying opportunity.
House of cards
Of course, these aren’t the only things the world is worrying about. There’s the Italian government’s stand-off with the EU and President Trump’s trade wars, as he doubles down by threatening another $200bn tariffs on Chinese goods. Others are warning that the inverted bond yield is pointing towards a global recession. None of these would help the FTSE 100 either.
The emerging markets crisis has been driven by the US Federal Reserve’s policy of steadily increasing interest rates, which is squeezing countries that have borrowed heavily in dollars. The Argentinian peso fell 30% against the dollar last week and the country’s central bank responded by hiking interest rates 15% to 60%, the highest in the world. Yes, you read that correctly.
Inflation in Venezuela has just topped 60,000%. Again, your eyes are not deceiving you. Next month’s elections in Brazil are the next worry, with the Brazilian real vulnerable. Soon we may be talking Turkey again, too.
Domino effect
The IMF has been warning of a mounting debt crisis in poorer countries for months, and sentiment is being shredded. Asian shares are a sea of red this week, as they say. The Chinese market is down 11% in the last three months, MSCI reports, beating the 4.5% drop for emerging markets as a whole.
Yet the US continues to race ahead of the rest of the world. Its economy grew at 4% a year in the second quarter. No wonder investors are pouring into the country and shunning emerging markets. These safe haven inflows will further strengthen the dollar, and squeeze those with dollar-denominated debts.
Contagion
So far, contagion has been limited, although the FTSE 100 did drop last week on fears the developed world will also take a hit. It now contains plenty of bargain stocks. However, that was also down to the surge in the pound, amid increasingly conciliatory leaks from Brexit negotiations.
You could argue that the buying opportunity is already upon us. At time of writing, the FTSE 100 trades at 7,246, down from 7,877 in May, a drop of 8%. It could fall further. A Brexit deal before the end of the year is likely to be bad for the FTSE 100 because, as we have seen, the slightest bit of positive news instantly drives up the pound.
Pound up, FTSE down
With FTSE 100 companies generating more than three quarters of their earnings overseas, this reduces their value in sterling terms, hitting profits. Remember how the pound fell and FTSE 100 flew after the shock Referendum result? Now that trade could go the other way. Maybe you should get ready for it…
