The recent economic downturn in China has taken a major toll on their supplier countries especially other emerging markets that supply raw materials and other goods that are essential items in China. Some investors like Ken Griffin, the CEO of Citadel LLC, thinks thats a key reason why many hedge fund managers are worried about Brazil and South Africa defaulting on current loans. Mr. Griffin has a lot of experience when it comes to managing emerging market assets. His company has more than $26 billion assets under management. Griffin has been analyzing the current China situation, and he believes South Africa and Brazil will not default on their loans, but he does say that both countries have corruption issues that can impact their ability to pay.
Ken Griffin is a genius when it comes to predicting the financial health of emerging markets, and he thinks there could be a global crisis of some kind in 2016 especially if the Federal Reserve starts raising interest rates. The first interest rate increase could come before the end of 2015. An increase in interest rates will be the catalyst for more corporate bankruptcies, according to Griffin. The International Monetary Fund has asked the Feds to hold any rate increase until sometime in 2016. The IMF is concerned that a rate increase could trigger a major divestment of assets. In 2008, more than $40 billion worth of assets were lost in the third quarter.
Brazil, more than South Africa, is getting most of the attention from investors, according to economists. Investors are pulling out of Brazil because the currency is down more than 30 percent against the dollar this year. Some investors are betting that Brazil will default and South Africa will not because the South African rand is only down 15 percent for the year.
As Mr. Griffin pointed out, political corruption in Brazil could be the straw that breaks their economic back. President Rousseff is weak, and her finance minister doesnt have the support of her cabinet. Rousseff approval rating now stands at 8 percent, and it is dropping daily. The new budget is supposed to plug holes in the countrys 8 to 10 percent deficit, but some economists and investors doubt the budget will help as much as the government says it will.
The main indicators of a default by Brazil and South Africa, according to Griffin, are dropping currency rates and government bond yields. Right now the dropping currency value in Brazil is the main indicator that there could be trouble ahead when it comes to paying back loans. The bond yields can be manipulated by the central bank if they are government controlled, so currency devaluation is the main red flag at the moment.
But Griffin and other investors believe the price of oil and the changes the Chinese government is putting in place will help Brazil and South Africa recover. Some investors arent waiting for those changes to materialize, but Griffin says that waiting is the best strategy if investors want big returns in emerging markets.