Login Open account
United Kingdom
Back
Manage Consent
Details Cookies
United Kingdom
Important margin product information

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs, FX or any of our other products work and whether you can afford to take the high risk of losing your money.

Cookie policy

This website uses cookies to offer you a better browsing experience by enabling, optimising and analysing site operations, as well as to provide personalised ad content and allow you to connect to social media. By choosing “Accept all” you consent to the use of cookies and the related processing of personal data. Select “Manage consent” to manage your consent preferences. You can change your preferences or retract your consent at any time via the cookie policy page. Please view our cookie policy here and our privacy policy here

Necessary
Show more
Show more
Show more
Show more
International Australia 中国大陆 België Belgique Česká republika Danmark France Hong Kong S.A.R 中國香港 Italia UAE الشرق الأوسط Nederland Norge Polska По-русски Singapore Slovenská republika Switzerland Suisse Schweiz 日本
Accept all Necessary only Manage consent Save and close Accept all
United Kingdom
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider.
Show more
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs, FX or any of our other products work and whether you can afford to take the high risk of losing your money. Losses can exceed deposits on some products.
Show less
Emerging Markets: This is not 1997 again Emerging Markets: This is not 1997 again Emerging Markets: This is not 1997 again

Emerging Markets: This is not 1997 again

Macro
CD
Christopher Dembik

Head of Macro Analysis

Summary:  The current weakness in emerging markets is a clear indicator that the global credit cycle is turning down and that more headwinds are coming.

Since mid-April, emerging market currencies have fallen sharply versus the USD. The most significant drops have been experienced by the TRY (-58%), BRL (-22%), ZAR (-20%) and RUB (-15%).
Depreciation versus USD

The current weakness in emerging markets is a clear indicator that the global credit cycle is turning down and that more headwinds are coming.

Since the Great Financial Crisis, an excess of liquidity has supported global growth and flowed to emerging countries, leading to an increase of debt. Over this period, US-denominated debt has increased by 152%, which represents more than $2 trillion.

Foreign debt to EM by currency denomination

Due to monetary policy normalisation, liquidity has been drying up since the beginning of this year. Our model of global USD money supply based on the 25 largest economies reached a peak in January 2018 and is now at its lowest level since Spring 2017. 

The dollar liquidity squeeze along with global tightening financial conditions drives higher funding costs in EM. The most vulnerable countries are the ones with high current account deficits (meaning they are heavily dependent on foreign funding) and high levels of USD-denominated debt.

A break of the Dollar Index above the 95 level, like the one seen this past summer, would add more pain to EM as it would signal that servicing greenback loans is getting more and more expensive. It would certainly constitute a strong risk-off signal and cause more capital outflow from EM.

The downward USD liquidity trend can only be reserved by stronger growth or central bank stimulus, which are both very unlikely in the medium term. 
USD liquidity indicator

Turkey has been the first domino to fall. The country shares a lot of similarities with Thailand in 1997, which at that time faced an external debt reaching 65% of GDP coupled with a currency crisis and a sudden loss of investor confidence. Turkey’s external debt is about 56% of GDP and its short-term US-denominated debt currently sits at its highest-ever level around $200 billion. Its currency has been falling sharply while political risk has pushed away foreign investors. 

The only bright side, and one that we didn't see in 1997's Thailand and don't see in the ongoing Argentinian crisis is that Turkish residents are repatriating foreign assets to deal with this tricky external funding picture, which will bring some support in the short term.
Turkey current account balance

Is another, 1997-style emerging country crisis on the cards? It's unlikely. Not all emerging countries, after all, are equal; we notice that countries with better GDP readings and current account positions are less exposed to the current headwinds. Trade openness is also a key criterion that has more influence than it did in 2013 when the Fed taper occurred.
Current account balance as % of GDP

EMs that have reduced reliance on FX debt have demonstrated better resilience than others other the past few months. These efforts are particularly striking in CEE, especially in Poland and in Hungary where FX-denominated debt has decreased by roughly nine percentage points since the end of 2016. 
Change in EM FX-denominated debt

Contagion has largely been contained globally, expect for countries with high political risk situations (Argentina, Brazil, South Africa, and Turkey). Rising political risk has acted as an aggravating factor for investors. 

Of these four countries, Brazil seems to be in the best economic shape. Its current account deficit stands at only 1% of GDP and it has enough foreign reserves (at $367bn) to efficiently defend its currency. The only negative macro data are linked to the high level of public debt, but since this is owned mostly by domestic holders (95%), the risk is more limited. 

In addition, the latest economic data, especially leading indicators such as the Itaú Monthly GDP reading, tend to confirm economic activity is set to accelerate slightly. We believe that the current vulnerability seen in Brazil will prove short-lived as it is essentially a consequence of uncertainty surrounding the upcoming October election (the first round of voting is on October 7 and the second on October 28).
Brazil: Itau monthly GDP index vs. real GDP

By contrast, tougher days might be coming for South Africa. The honeymoon between President Ramaphosa and investors is definitively over. The country plunged into technical recession in Q2 for the first time since 2009 and political risk keeps rising due to the land reform programme that should be formally implemented at the beginning of next year. 

This agrarian reform has a massive knock-on effect on investors and South Africa is not well-prepared to deal with its negative consequences. The country’s current account deficit has narrowed since 2014 but still stands at 3.2% of GDP, and South Africa does not have enough currency reserves to defend the rand against any prolonged period of speculation. Despite a year-on-year increase of 1.9%, South Africa's international reserves stand at just $42bn, the equivalent of five months' worth of imports.
South Africa current account balance

Looking at EMs as a whole, we have seen a sharp economic transformation over the past decade. The main vulnerability still comes from these countries' strong reliance on USD funding, which has considerably increased since 2008.
 
many EMs, however, notably those in Southeast Asia, face fewer domestic imbalances than in 2013 or in the late 1990s, making them more resilient to the global QE exit and lower USD liquidity. The most fragile countries are those with weak fiscal positions and high political risk. After Turkey and Argentina, South Africa could face higher tensions. On the other hand, the situation should quickly stabilise in Brazil once the election has passed. So far, there is no risk of contagion to any other EM economy. 

Quarterly Outlook Q1 2023: The models are broken

  • The models are broken

    The market is trying to get back to the pre-Covid and pre-war times, but that model is broken. A new dawn is here and the financial world needs to adapt.

    Steen Jakobsen,
    Chief Investment Officer

    Read article

  • Refitting China’s broken growth engine

    A political switch in China towards less tough control of its people and companies may kick things back into gear.

    Redmond Wong,
    Market Strategist

    Read article

  • Broken Europe

    While the economic situation in Europe may not be as bad as feared, there's still a plethora of things to fix.

    Chris Dembik,
    Head of Macroeconomic Research

    Read article

  • A painful phase transition

    As the world turns increasingly bipolar, equity markets face harsh times as they transition into the new reality.

    Peter Garnry,
    Head of Equity Strategy

    Read article

  • Opportunities in a deglobalising world

    New alliances and collaborations outside of China may lead to prosperous times in Asia.

    Charu Chanana,
    Market Strategist

    Read article

  • Is the ‘balanced’ 60/40 equity/bond portfolio a thing of the past?

    For years, it was thought that the balanced portfolio was a thing of the past. But recent developments may have changed that.

    Peter Siks,
    Investment Coach

    Read article

  • China reopening will drive another strong year for commodities

    Following a dramatic and volatile 2022 with good returns, a lot of this year's commodity performance may be driven by Chinese politics.

    Ole S. Hansen,
    Head of Commodity Strategy

    Read article

  • Latecomers to tightening party, EUR and JPY, may prove safest harbours in the first half

    2023 could be a tough year for currencies but EUR and JPY may have some upside.

    John J. Hardy,
    Head of FX Strategy

    Read article

  • China reopening a boon to Australian assets?

    The commodity-heavy Australian market may have a good start to 2023, as the Chinese focus on growth signals demand for Aussie resources.

    Jessica Amir,
    Market Strategist

    Read article

  • Can institutions save crypto before retail vanishes?

    From a near-perfect environment for speculative assets before 2022 to the opposite, crypto faces fundamental challenges.

    Mads Eberhardt,
    Cryptocurrency Analyst

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Support Centre
For existing clients, please click here to request support via the Support Centre.

Have a question about our products, platforms or services? Visit the Support Centre to find answers for our most frequently asked questions. If you are still unable to locate an answer to your question, you will also find contact details for your local Saxo office to speak with a representative.

Contact Saxo

Select region

United Kingdom
United Kingdom
Products & pricing
Platforms
Accounts & service
General
Other
Legal

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs, or any of our other products work, and whether you can afford to take the high risk of losing your money. The value of your investments can go down as well as up. Losses can exceed deposits on some margin products. Professional clients can lose more than they deposit. All trading carries risk.

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.