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Emerging markets are next 'asset bubble' amid yield hunt, debt

Demonstrators clashing with riot police for a fourth straight day on Tuesday in Valparaiso, Chile. The government has declared a state of emergency, triggering a 1.9 per cent drop in the peso and a 4.6 per cent fall in its stocks.


A LOOK at the price action and you'd be forgiven for thinking all was well in emerging markets.

Far from it.

While indexes of stocks, bonds and currencies hover around their strongest levels since early August, political crises from Ecuador and Argentina to Turkey, South Africa and - most recently - Chile and Lebanon are reminding investors of the risk of getting too deep in some of the highest-yielding markets.

For David Levy, chairman of the Jerome Levy Forecasting Center, the combination of the clamour for higher returns and ballooning debt levels in the developing world is reminiscent of the US housing market before the global financial crisis.

"This cycle's asset bubble is the emerging-market sector," Mr Levy said. "In the next recession there will be serious problems for emerging markets."

The turmoil was underscored on Monday when Chile, which has Latin America's highest-rated debt, was engulfed in protests. That prompted the government to declare a state of emergency, triggering a 1.9 per cent drop in the peso and a 4.6 per cent fall in its stocks.

Ecuadorian protests, meantime, escalated after President Lenin Moreno ended fuel subsidies. In Argentina, investors are on edge ahead of a presidential vote on Sunday that's expected to hand victory to leftist candidate Alberto Fernandez. And in Lebanon, dollar yields just soared to 24 per cent as the government struggled to quell demonstrations against worsening economic conditions.

Eurobond sales from emerging markets this year have already exceeded the volume raised in all of 2018, as borrowers take advantage of high demand for their debt. Issuance in dollars and euros from governments and companies in developing nations has reached US$525 billion, a 20 per cent increase over the same period last year, according to data compiled by Bloomberg.

"There seems to be fatigue among investors with the geopolitical risk in emerging markets," said Sergey Dergachev, senior portfolio manager at Union Investment in Frankfurt. "They are trying to look beyond the barrage of headlines about politics, demonstrations, sanctions. But ignore these for long and you may be hurt badly." BLOOMBERG

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