Market view – the coming emerging markets meltdown

The world is on the brink of yet another emerging market meltdown whose twin epicenters are now Istanbul’s Bosphorus and the Argentine pampas – writes Matein Khalid

Five years after the 2013 ‘taper tantrum’, the world is on the brink of yet another emerging market meltdown whose twin epicenters are now Istanbul’s Bosphorus and the Argentine pampas. There is now a tangible risk of contagion in the asset class, a ghastly replay of 1998 and, yes, 2008. I got MBA (Master of Bubblelogy and Amnesia!) in Wharton but got my true education trading the global markets during Mexico ’94, Thailand/Indonesia in ’97, Russia in ’98, Turkey and Argentina in 2001 and the GCC since the Emaar IPO. This time the wolf is here. Here’s 12 reasons why:

• King Dollar is in the early stages of another major bull run as Italy emerges as Europe’s next systemic risk.
• The spread between 2 and 10 year US Treasury bond notes has flattened to 48 basis points even while a June FOMC rate hike is certain. An inverted yield curve is a disaster for emerging markets since it means recession risk in the West is imminent.
• The sheer scale of Fed monetary tightening since December 2015 has a multiplier effect in the emerging markets.
• Oil importing emerging markets face a triple whammy due to $78 Brent. Note the plunge in the Indian rupee to 68 as oil is 70% of New Delhi’s current account.
• Emerging markets are dangerously leveraged due to the post Lehman decade of negative real interest rates, which generated a $14 trillion tsunami of dollar debt borrowing. As LIBOR rises, these overleveraged chickens will come home to roost as credit Frankensteins.
• Internal debt, banking crises and corporate debt blow ups are now inevitable in emerging markets. This will create fiscal black holes, as in Brazil and India.
• With Pompeo as America’s top diplomat, Gina as its top spymaster (actually spy mistress!) and John Bolton as NSC chief hancho, the case for another geopolitical collision between Israel and Iran in Syria/Lebanon is certain. The resurrected ghosts of July 2006 will send shock waves across the Middle East and the provinces of black gold.
• Russia is in recession again, thanks to sanctions. I expect a López Obrador (loony left!) victory in Mexico and a populist backlash in Brazil. This means emerging market growth rates fall and public finance deficits widen.
• The US trade deficit to China can only shrink if Chinese exports to the US decline, a disaster for the Pacific Rim’s Asian tigers.
• Distress in Egypt/North Africa and sub-Saharan Africa has been amplified by botched devaluations, terrorist threats from Madhugiri state in Nigeria to the Nile Delta, pandemic risk (Ebola/Congo) and austerity programs against IMF diktat. Financing to sub-Saharan Africa is as fragile as a desert mirage in 2018.
• Apart from Saudi Arabia, GCC markets face growth pressures, a vicious property bear market and a protracted bank cash crunch. Not even a 45% rise in oil prices has led to a bull market in the UAE or Oman even while Saudi equities are up 15% in 2018. Why?
• As a Pakistani and an obsessive student of the East India Company’s imperial shadow on my country and family’s past, I am horrified by the sheer scale of the developing world’s borrowing and financial dependence on China. Any threat to the Chinese growth model will spell disaster for the dark alleys of the Third World, rebranded charitably but inaccurately as “growth markets” by Abraaj Capital before its own growth was aborted by the misuse of funds scandal. If government to government loans from China are included, emerging market debt liabilities rise by 20%. This is all floating rate debt that can never be repaid.

I expect another 1980’s style intercontinental default wave in the emerging markets. Entire countries and banking systems will go bankrupt or, as my Chicago futures trading cronies used to put it, belly up. I predict the mother of all debt restructurings. Thirteen, Argentina tells me the linkage between internal debt held by gringos and post Macri, post Paris Club sovereign borrowing is a recipe for financial disaster. Yet I can name a dozen countries in the same boat as Argy Bargy. Fourteen, imagine a world that needs $500 billion in IMF bailouts? Will Trump’s America First xenophobes ever agree to a dozen IMF bailouts? Do horses fly. Net net, get real, get out! Remember George Santayana. Those who refuse to learn the lessons of history are doomed to repeat them. Sad but true!

Matein Khalid is Chief Investment Officer of Asas Capital in the DIFC; he is responsible for global investment strategy and the development of the multi family office platform. He has worked in Wall Street money centre banks, securities firms and hedge funds in New York, London, Chicago and Geneva. In addition, he has been an advisor for royal investment offices in the Gulf for 8 years. Mr Khalid has four degrees in finance, economics, banking and international relations from the Wharton School, University of Pennsylvania. He is a director at the American College of Dubai and has taught MBA level courses in commercial/investment banking at the American University of Sharjah and British University of Dubai. He writes the Global Investing columns for Khaleej Times, Gulf Business and Oman Economic Review.