Alex at Macro-ops believe that China, and EM in general, is set to be a dead money trade and massive value trap for the remainder of this cycle.
He concludesEM’s structural growth limitations can be boiled down to the following:
– EMs are BoP constrained . Since they have soft currencies — meaning, they can’t finance current account deficits in their own money — they can’t grow faster than their exports for an extended period of time. Because, a current account deficit leads to a build up of hard currency debt, hot money outflows, and a BoP crisis.
– EMs have maxed out their market share of global exports. EMs now comprise over 50% of global non-commodity exports (see chart below) and further export share growth will likely be from one EM cannibalizing another. Globalization has peaked and with increasing trade tensions, we should even see a reversal of some of the outsourcing and offshoring that’s occurred over the past two decades.
– EMs are facing a significant debt burden amid tightening global liquidity. EMs are weighed down by a large amount of debt which they’ve accumulated in financing their current account deficits over the last decade, and much of this debt is dollar denominated. Rising US interest rates and a strengthening dollar will continue to put pressure on EMs going forward.
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