The selloff will probably “constitute only a small part of a bigger trend for emerging assets” as countries fueled by cheap credit are “wrong-footed” in an environment of rising interest rates, Goldman Sachs strategists led by London-based Thomas Stolper wrote in a June 14 note. The lira, real, rand, Thai baht and Philippine peso are the most vulnerable, the analysts wrote.
Budget Gaps
Imports fueled by cheap borrowing increased the current- account deficits of Chile, Brazil and Indonesia to the highest in at least a decade, leaving the countries susceptible to capital flight, data compiled by Bloomberg show. South Africa needs to attract $63 billion of foreign capital every month to sustain its consumption.
International investors have less incentive to provide that cash while rates at home are rising. The yield on the benchmark 10-year U.S. Treasury note jumped to 2.47 percent, the highest since August 2011.
The declines in emerging-market assets may accelerate outflows and create a vicious cycle, according to Phillip Blackwood, who oversees $3.7 billion of developing-nation debt as managing partner at EM Quest Capital LLP in London.
“This is the beginning of the end of the easy money,” said Blackwood, who’s betting on a retreat in the lira and Colombian peso. “The positive situation they were in before is now reversing. That’s a perfect storm for further drops.”