INSUBCONTINENT EXCLUSIVE:
By
Andy MukherjeeIt was supposed to be a play in three acts
Wall Street banks and the US economy took the first blow from the Lehman crisis
Next, the epicentre of trouble moved to Europe, causing a run on sovereign debt
The overhang of global borrowing was then going to culminate in a big emerging-market fiasco, caused perhaps by a disorderly unwinding of
demise have steadied emerging markets ever since.
Discussions about the origins of the pre-Lehman exuberance focus too much on bankers
shuffling risky subprime mortgages into triple-A-rated securities
Among other things, an oversupply of retirement savings relative to demand crushed the real interest rate the economy could afford to
Fed chiefs have been criticized for their too-low-for-too-long policies
Demographics, however, may have left them with little choice.
Population pyramids will continue to cast a long shadow on the investment
In developing nations, there still are 12 people in the 25-64 age group for every person aged 70 or more
By 2055, on current United Nations projections, emerging markets will be as old as developed countries are now, with four young and
middle-aged workers for every old person.
Pension accumulators in emerging markets will demand new local-currency assets
The Indonesian rupiah is at its weakest since the 1998 Asian contagion, and the Indian rupee recently sank to a record low
Russia, South Africa, Brazil, Turkey and Argentina have fared worse
Yet there are good reasons to believe this storm will blow over without permanent damage to emerging markets as an asset class
To see why, start with the strong dollar
At first glance it appears to be an outsized threat
At $3.7 trillion, the dollar debt of non-bank borrowers in emerging markets is about $2 trillion more than its pre-Lehman high.
About half
of that $2 trillion increase, however, has been on account of bonds
In the 1998 Asian crisis, emerging markets were overly reliant on flighty cross-border dollar financing by banks
After years of quantitative easing and elevated asset prices in Japan, the US and Europe, rich-nation pension managers reduced their home
bias and flocked to the higher-yielding debt and equity of emerging markets
From a negligible portion of a $12 trillion total in 1997 to generous allocations out of a $38 trillion pile in 2017, pension money from
the West, Japan and Australia has become a cushion in emerging markets
And unreliable bank financing is still 57 percent of the $3.7 trillion non-bank dollar debt of emerging markets
Banks are cautious because their own funding, which is often wholesale, has become costlier as the Fed raises rates
Its equity markets have been ghastly this year, but MSCI Inc is still adding more mainland stocks to its benchmarks
Giving exemptions to overseas institutions from taxes on interest gains may pull more overseas money into onshore Chinese bonds.
Assuming
bet on it.
The reason is once again pension assets, though not only of rich-country workers
globally, according to Willis Towers Watson
But that, I suspect, will be a whole new play, not just the third act of the Lehman drama.
