by Bryan Perry
October 18, 2022
For the better part of 2022, the about-face and stampede to raise rates by the Federal Reserve has certainly put pressure on U.S. stocks, bonds, and housing, but more importantly, their actions are accelerating the chance of something “breaking” in foreign markets. The Fed is considered the global central bank that pretty much dictates how other central banks will shape monetary policy. They don’t have much choice.
It is this main focal point that will likely be the cause of that sound of something “snapping” overseas in the form of a major debt default by a large emerging market, a freezing of liquidity within the sovereign bond market, or some nonlinear forex price action in which a major currency just decouples under panic selling. Per a recent September statement out of the World Bank: “Rising global borrowing costs are heightening the risk of financial stress among the many emerging market and developing economies that over the past decade have accumulated debt at the fastest pace in more than half a century.”
Even as we see massive swings in British bonds, amid misguided policy steps by Prime Minister Liz Truss, forcing the Bank of England to intervene so as to afford a window for pension funds to unwind risky bets, its actions served as only a temporary shoring up of the pound’s free fall. This past week the pound started to roll over and may well revisit – or even take out – its September 28 low.
What’s to stop this same thing from happening with the dollar index, which tracks the dollar against a basket of advanced economy currencies, and is higher by 20% over the past year? Taking into account emerging market currencies, this move against them has been considerably more dramatic, both in terms of exchange rate and inflation. Much of emerging market debt has to be paid back in dollars and all oil transactions around the globe are conducted in dollars, still considered the world’s reserve currency.
If and when something breaks, it would likely be linked to a debt servicing crisis. A recent Allianz report concluded that “current debt-to-GDP ratios in France (113%), Italy (151%) and Spain (118%) imply a herculean fiscal consolidation effort to avoid an interest hangover” as debt-servicing costs explode higher. And Japan’s government debt is in worse shape, accounting for 231% of the country’s nominal GDP as of June 2022. Last Tuesday, the yen hit a new 24-year low against the dollar, down roughly 27% in 2022.
As troublesome as the weaker currency issues are in the UK, the EU, and Japan, it seems the biggest near-term risk of glass breaking overseas will be with emerging market debt. A systemic sell-off could be in the making, given the dollar’s rise, which intensifies debt levels in emerging markets. Without a policy change by the Fed to all but end the $95 billion per month QT program, it might just break open the dam.
Emerging market borrowing, led by China, inflated the global debt mountain to a record $303 trillion in 2021, although the global debt-to-GDP ratio improved as developed economies rebounded, according to the Institute of International Finance. The $10 trillion rise in the global debt pile was down from the $33 trillion increase in 2020, when COVID-19-related expenditures soared. But more than 80% of last year’s new debt burden came from emerging markets, where total debt is approaching $100 trillion, according to the Institute of International Finance (IIF), in its annual global debt monitor report (source: Reuters).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The most widely traded emerging market bond ETF is the iShares JP Morgan USD Emerging Markets Bond ETF (EMB) with about $13.8 billion in assets under management, trading roughly seven million shares a day. It is about as close a reflection of the health of the non-developed world debt market as one can monitor in terms of getting some kind of real time measure for the broad view of this asset class.
Because this is a managed fund, it doesn’t represent the gravity of the risk in the broader scope of the emerging market debt market, as China represents just 1.88% of its assets (ranked #22 on the list), and other highly leveraged countries are also smaller positions per this list of holdings:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Mexico is its largest holding. Mexico is also the largest trading partner with the U.S., and so the fund is getting crushed, down 30% YTD, as both the dollar and interest rates rise to fend off inflation.
The chart of EMB (above) is flashing red and should be seen by the Federal Reserve as a market where it’s not a matter of “if” but “when” it breaks, because the biggest holders of emerging market debt are the banks of those countries issuing the debt, as well as a large amount held by European banks.
| Top 10 | |||
| Mexico | 5.69% | ||
| Indonesia | 5.50% | ||
| Qatar | 4.76% | ||
| Turkey | 4.52% | ||
| Saudi Arabia | 4.39% | ||
| United Arab Emirates | 4.15% | ||
| Philippines | 3.92% | ||
| Brazil | 3.77% | ||
| Oman | 3.70% | ||
| Peru | 3.38% | ||
| #11-20 | |||
| Dominican Republic | 3.25% | ||
| South Africa | 3.21% | ||
| Colombia | 3.14% | ||
| Chile | 3.13% | ||
| Panama | 3.12% | ||
| Bahrain | 3.05% | ||
| Egypt | 2.69% | ||
| Malaysia | 2.48% | ||
| Uruguay | 2.35% | ||
| Kazakhstan | 2.04% | ||
| #21-30 | |||
| Nigeria | 1.95% | ||
| China | 1.88% | ||
| Hungary | 1.83% | ||
| British Virgin Islands | 1.72% | ||
| Romania | 1.50% | ||
| Argentina | 1.27% | ||
| Ecuador | 1.27% | ||
| Angola | 1.26% | ||
| Cayman Islands | 1.24% | ||
| Jamaica | 0.96% | ||
| #31-40 | |||
| Kenya | 0.89% | ||
| Ghana | 0.85% | ||
| Kuwait | 0.83% | ||
| Azerbaijan | 0.77% | ||
| Pakistan | 0.75% | ||
| Jordan | 0.71% | ||
| India | 0.67% | ||
| Poland | 0.62% | ||
| Netherlands | 0.60% | ||
| Costa Rica | 0.59% | ||
| #41-50 | |||
| Sri Lanka | 0.57% | ||
| Ukraine | 0.56% | ||
| Hong Kong | 0.56% | ||
| Paraguay | 0.54% | ||
| Senegal | 0.30% | ||
| Morocco | 0.30% | ||
| Iraq | 0.28% | ||
| Croatia | 0.27% | ||
| Zambia | 0.26% | ||
| Guatemala | 0.24% | ||
| #51-60 | |||
| Ivory Coast | 0.20% | ||
| El Salvador | 0.20% | ||
| Vietnam | 0.19% | ||
| Trinidad and Tobago | 0.17% | ||
| Serbia | 0.15% | ||
| Bolivia | 0.14% | ||
| The United States | 0.14% | ||
| Gabon | 0.14% | ||
| Tunisia | 0.11% | ||
| Lebanon | 0.10% | ||
| Ethiopia | 0.10% | ||
| Australia | 0.08% | ||
| Venezuela | 0.04% | ||
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Inflation Stays Stubbornly High, So the Fed Will Likely Stay Aggressive
Income Mail by Bryan Perry
The Fed Needs to Hear the Sound of Something Breaking
Growth Mail by Gary Alexander
Hurricane Season is Almost Over – In New Orleans and on Wall Street
Global Mail by Ivan Martchev
Where the $6 Trillion Came From
Sector Spotlight by Jason Bodner
But Seriously, Doc, How Bad is This Market?
View Full Archive
Read Past Issues Here
Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
Important Disclosures:
Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not a solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.To the extent permitted by law, neither Navellier & Associates, Inc., nor any of its affiliates, agents, or service providers assumes any liability or responsibility nor owes any duty of care for any consequences of any person acting or refraining to act in reliance on the information contained in this communication or for any decision based on it.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report. Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.
None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The holdings identified do not represent all of the securities purchased, sold, or recommended for advisory clients and the reader should not assume that investments in the securities identified and discussed were or will be profitable.
Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for every investor. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.
One cannot invest directly in an index. Index is unmanaged and index performance does not reflect deduction of fees, expenses, or taxes. Presentation of Index data does not reflect a belief by Navellier that any stock index constitutes an investment alternative to any Navellier equity strategy or is necessarily comparable to such strategies. Among the most important differences between the Indices and Navellier strategies are that the Navellier equity strategies may (1) incur material management fees, (2) concentrate its investments in relatively few stocks, industries, or sectors, (3) have significantly greater trading activity and related costs, and (4) be significantly more or less volatile than the Indices.
ETF Risk: We may invest in exchange traded funds (“ETFs”) and some of our investment strategies are generally fully invested in ETFs. Like traditional mutual funds, ETFs charge asset-based fees, but they generally do not charge initial sales charges or redemption fees and investors typically pay only customary brokerage fees to buy and sell ETF shares. The fees and costs charged by ETFs held in client accounts will not be deducted from the compensation the client pays Navellier. ETF prices can fluctuate up or down, and a client account could lose money investing in an ETF if the prices of the securities owned by the ETF go down. ETFs are subject to additional risks:
- ETF shares may trade above or below their net asset value;
- An active trading market for an ETF’s shares may not develop or be maintained;
- The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track;
- The cost of owning shares of the ETF may exceed those a client would incur by directly investing in the underlying securities; and
- Trading of an ETF’s shares may be halted if the listing exchange’s officials deem it appropriate, the shares are delisted from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.
Grader Disclosures: Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. The sample portfolio and any accompanying charts are for informational purposes only and are not to be construed as a solicitation to buy or sell any financial instrument and should not be relied upon as the sole factor in an investment making decision. As a matter of normal and important disclosures to you, as a potential investor, please consider the following: The performance presented is not based on any actual securities trading, portfolio, or accounts, and the reported performance of the A, B, C, D, and F portfolios (collectively the “model portfolios”) should be considered mere “paper” or pro forma performance results based on Navellier’s research.
Investors evaluating any of Navellier & Associates, Inc.’s, (or its affiliates’) Investment Products must not use any information presented here, including the performance figures of the model portfolios, in their evaluation of any Navellier Investment Products. Navellier Investment Products include the firm’s mutual funds and managed accounts. The model portfolios, charts, and other information presented do not represent actual funded trades and are not actual funded portfolios. There are material differences between Navellier Investment Products’ portfolios and the model portfolios, research, and performance figures presented here. The model portfolios and the research results (1) may contain stocks or ETFs that are illiquid and difficult to trade; (2) may contain stock or ETF holdings materially different from actual funded Navellier Investment Product portfolios; (3) include the reinvestment of all dividends and other earnings, estimated trading costs, commissions, or management fees; and, (4) may not reflect prices obtained in an actual funded Navellier Investment Product portfolio. For these and other reasons, the reported performances of model portfolios do not reflect the performance results of Navellier’s actually funded and traded Investment Products. In most cases, Navellier’s Investment Products have materially lower performance results than the performances of the model portfolios presented.
This report contains statements that are, or may be considered to be, forward-looking statements. All statements that are not historical facts, including statements about our beliefs or expectations, are “forward-looking statements” within the meaning of The U.S. Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as “expect,” “estimate,” “plan,” “intend,” “believe,” “anticipate,” “may,” “will,” “should,” “could,” “continue,” “project,” or similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions, and projections, are not guarantees of future results or performance, and involve substantial risks and uncertainty as described in Form ADV Part 2A of our filing with the Securities and Exchange Commission (SEC), which is available at www.adviserinfo.sec.gov or by requesting a copy by emailing info@navellier.com. All of our forward-looking statements are as of the date of this report only. We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. You are urged to carefully consider all such factors.
FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.
IMPORTANT NEWSLETTER DISCLOSURE:The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.
Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.
Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report.
FactSet Disclosure: Navellier does not independently calculate the statistical information included in the attached report. The calculation and the information are provided by FactSet, a company not related to Navellier. Although information contained in the report has been obtained from FactSet and is based on sources Navellier believes to be reliable, Navellier does not guarantee its accuracy, and it may be incomplete or condensed. The report and the related FactSet sourced information are provided on an “as is” basis. The user assumes the entire risk of any use made of this information. Investors should consider the report as only a single factor in making their investment decision. The report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. FactSet sourced information is the exclusive property of FactSet. Without prior written permission of FactSet, this information may not be reproduced, disseminated or used to create any financial products. All indices are unmanaged and performance of the indices include reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot be made in any index. Past performance is no guarantee of future results.