The slow and steady rise in interest rates that that Fed kicked off in December 2015, is now having visible impact on emerging markets. India, Turkey, Iran, Brazil and others are feeling the pain of rate hikes from the central bank of the world, the US Fed. Everything now costs more, the food that people eat, the fuel that they uses for tractors, even school books and needs for children are all rising, funds are abandoning emerging markets and economic activity is slowing. Look for countries like Iran and Brazil to suffer in the coming months and years.
As Washington hikes rates, the post-2008 ultra-low interest rates are ending. These were the lowest rates in 70 years, flooding all markets with cheap funds. Now that the end of cheap money has arrived, the challenges for the emerging market world will only increase. When money was cheap, almost zero, many investors who had access to free money traveled the global, looking for high risk, high reward investments that no one else wanted. The deceleration of the global economy seems like a new reality we must face in 2019.
And when economies fade, sometimes nations pick fights……
Imagine the challenges to the regime in Iran, one that might be inclined to pick a fight with its neighbor, possibly Saudi Arabia. We think that a sign of desperation would be the government of Iran rearming and starting brinksmanship in the region. The EM complex will be shockingly volatile in the coming year, but there will be trading opportunities in 2019 and 2020.