Non-financial corporate debt has been rising exponentially, especially in emerging Asia. Companies in Hong Kong, Singapore, China, Turkey and Brazil have seen the largest growth in debt. Since a rising proportion of this debt is denominated in US dollars, the devaluation of many EM currencies this year has been a catalyst for this increase in debt. This effect becomes even larger when considering that total corporate debt in emerging markets denominated in dollars has now reached 12% of GDP, up from 8% in 2008.
In Turkey, more than a third of total non-financial corporate debt is denominated in dollars, the third highest percentage in emerging markets after Hong Kong, which has pegged its currency to the dollar, and Mexico, which sends most of its exports to the US and ‘only’ saw its currency decline about 14% in 2015. In comparison, the Turkish lira has lost more than a quarter of its value to the dollar so far this year.
These worrying fundamentals might explain why Europe’s fund selectors are very wary about investing in emerging markets at the moment. Most fund buyers are already underweight the asset class, and still sellers outnumber buyers by a considerable margin. Appetite for emerging market debt is even lower: the share of fund selectors who have ditched the asset class completely is at its highest since at least 2010.
So is there no light at the end of the tunnel? Well, we have the Finns and the fund managers to end on a positive note. Defying the overall pessimist mood, more than half of Finland’s fund buyers plan to increase their allocation to both emerging market and Asian equities in the next 12 months. And according to September’s EIE Fund Manager Sentiment Survey, markets have reached their low. On average, asset management companies believe Asia ex-Japan equities will show a modestly positive performance over the next year.
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