An Emerging-Markets Rally Belies Worrying Economic Fundamentals

  • Debt, budget balances and current accounts raise red flags
  • Developing nations’ total debt to GDP is highest since 2004

Emerging-market bulls from UBS Asset Management to JPMorgan Asset Management often say that developing-nation economies are solid enough that they can handle rising rates in the U.S.

But there’s plenty of data to contradict that sentiment.

A look at external debt, budget balances, current-account figures and foreign-currency reserves for the 10 biggest emerging markets for which there was historical data (Saudi Arabia and Nigeria were excluded) paints a worrying picture. Of those measures, reserves is the only one that’s markedly improving, while the rest raise red flags.

Total debt to GDP is also climbing:

EM budget balances don’t look any better:

Current account balances offer a rosier, though not stellar, picture:

The data in the charts includes countries in Latin America, Asia and Europe. China is in there, but the trends in the graphs are the same without it.

Of course, bulls also cite other reasons for their argument, such as valuations relative to the U.S. and prospects of faster global growth, and the picture for some individual nations will be prettier than others. But the economic data are a reminder of the dangers of trading emerging markets as an asset class, instead of focusing on specific countries.

* NOTE: Camila Russo writes for Bloomberg’s Markets Live blog and some of this content appeared at MLIV first. The observations she makes are her own and are not intended as investment advice.

— With assistance by Carlos Torres

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