Asian economic slowdown and the EMD bubble

Last month I commented on the long term headwinds facing Asia and tried to cut through the sales cheese (see here). The last few weeks have seen more evidence of a slowdown in Asia, and seemingly more people buying into the EMD story as valuations in a number of countries have hit extremely expensive levels. Taking one example, in the middle of last week the $2.25bn issue of Peru 7.35% 2025s reached a yield spread of 109 basis points over US Treasuries. Liquidity on the bond is not fantastic, with a bid-offer spread of 1% on screens, implying that over a one year time horizon the yield spread is an illiquidity premium, with almost zero credit risk priced in. Spreads are reaching levels of the super liquid days prior to 2008. Bubbletastic.

Some charts below.

Australia’s economy appears to be struggling, with the Australian Dollar pushed higher by speculative inflows.

Many of the countries reliant on exporting to China are seeing flat or negative export growth year on year.

As discussed last month, Chinese growth has been highly dependent upon excessive investment growth. This has been driven by construction, which has been reliant on steel. So it’s interesting that steel prices have fallen 25% in the last year in China.

And finally the current bubbletastic spread levels on emerging market debt.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Discuss Article

  1. Lu Yu says:

    Chinese steel price and export figures only tell you a one-sided story of the country, so does the popular electricity production data. The thing that is often ignored is that China is undergoing industries rebalance – the slowdown in heavy industry which consumes more enenrgy and steel vs the growth in consumer products and services. I’d suggest you combine these heavy industry indicators with data that describe well what’s going on in the consumer world – to be more precise, you can use the sales of international companies who have across regions business in China, such as Yum Brands and Nike.

    Posted on: 13/08/12 | 1:39 pm
  2. John McDermott says:

    I heard some comments recently that touted that rebalancing of local government finances is required.  With an inability to issue debt, local governments went into unholy partnerships with private companies.  This is what we see as headline problems.  However, central government tax take has continued to increase, but spending has been slow to take up the slack.  
    So, the China economy has the potential for central government to take up the slack of private and local consumption by renewed stimulus.  If it chooses to do so.  Perhaps the pain isn’t sufficient yet to prompt action.

    Posted on: 13/08/12 | 8:40 pm
  3. Jon Beer says:

    In terms of the “speculative flow” into the AUD, I think your assumptions may be incorrect. Most of the demand is coming (still) from Central Banks all over the world increasing allocations to the currency, there’s also heavy demand from exporters (resource companies) repatriating  proceeds of sales. Still plenty of demand from Bond investors like yourselves as well, it’s even spread to NZD as a proxy despite that currency being even more overvalued in my opinion.

    Posted on: 14/08/12 | 8:00 pm

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