Daily Management Review

The Third Wave of Crisis


10/14/2015


Emerging markets are facing not just a market "defeat"; this is the third wave of the global financial crisis, believes Goldman Sachs.



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- Increasing uncertainty coming from the emerging market economies, lower commodity prices and potentially higher interest rates in the United States raised new concerns about the sustainability of growth in asset prices, which means a new wave of the global financial crisis, - said Goldman in a statement.
 
The decline in emerging markets, which coincided with the collapse of commodity prices, follows the US stage, provoked crisis of 2008-2009, and the European debt crisis round.
 
For the first time in nine years, concerns about the possibility of a rate hike by the Federal Reserve have led to a massive outflow of funds from emerging markets, including in Asia.
 
Nevertheless, the Fed's September meeting, when the rates were maintained at the same level, turned out as surprise to many, and most analysts say that rates will be raised at best next year.
 
This helped to stabilize the stock and foreign exchange markets, but some believe that it is only a temporary reprieve.
 
One reason for Goldman’s concern is the growth of payable over the world because of the low rates. Probably, this factor hinders future economic growth.
 
the risk of continued low interest rates on a permanent basis and fall of return on assets is increasing due to the economic problems. Yet, Goldman say that these fears are exaggerated.
 
- Most of the weakness in emerging markets and China are likely to reflect the change in the balance of economic growth, rather than a structural change, - the investment company’s analysts say. - While the maximum effect is likely to take some time (as it was during the American wave and then during the European), this should lead to the unwinding of economic imbalances, providing a platform for the "normalization" of economic activity, income and interest rates.
 
However, when it comes to return on equity, the expectations are not very rosy. It is not excluded that emerging markets will not be able to return "all the lost luster."
 
Apparently, the main advantages of the new recovery will be gripped by stock markets of developed countries and consumers, not producers and developing countries. And this trend will continue.
 
Some do not believe that economic recovery is possible on the emerging markets. Deutsche Asset and Wealth Management previously reported that the reduction in the rate of growth is compounded by the lack of structural reforms over the past 10 years.
 
- Ultra expansionistic monetary policy in developed economies has prompted many investors to invest in emerging markets, in part because they offered benefits on the interest rate - according to Deutsche. - In reality, however, this favorable environment funding just helped emerging markets disguise its growing economic weakness.
 
Companies in emerging markets are faced not only with a high debt load, but also with the burdensome interest payments on the background of weak economic growth.
 
This is an increase of loan defaults and a new wave of bankruptcies. The combination of high investment rates, debt increase and reduction of the growth rate has made developing countries much more vulnerable than before.






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