Liquidity conditions in emerging markets (EM) are tight, which bodes ill for EM equities.
R ecent data shows that the trade balance in emerging markets has continued deteriorating, a phenomenon that typically entails lower share prices. Falling commodity prices will support this negative trend for many EM countries.
One of the implications is that developing nations foreign reserves accumulation has slowed dramatically. In a number of countries, foreign reserves have in fact been depleted in the past year as authorities have sold international reserves to support their currencies, which, in turn, has squeezed domestic currency liquidity.
Additionally, liquidity will be squeezed as capital inflows to both resource-producing and commodity-importing EM countries deteriorate. FDI inflows into EM have topped out and based on M&A activities, are set to fall drastically this year.
For these reasons, our Emerging Markets Strategy service believes that liquidity creation in the developing world will be depressed despite interest rate cuts in several emerging economies.
Bottom line: The current situation looks bleak for EM equities.