EM currencies tend to respond particularly positively to two stimuli:
- Falling interest rates elsewhere in the world, coupled with high real interest rates in emerging markets.
- Times of a commodity boom
There is Good News for Everyone: Interest Rates Are Falling
When I talk about falling interest rates, I am referring to short-term rates, which are directly controlled by central banks. I expect long-term interest rates, which are largely insignificant for corporate financing, to remain stable or continue to rise.
The high level of debt in Western countries (and in China) makes financial repression an attractive option. Real interest rates are at 0% or below. These two factors make it easier for countries to service their debts, particularly when low interest rates ensure continued economic expansion and rising tax revenues.
For emerging market (EM) currencies, which also tend to experience falling interest rates, this generally means greater demand for goods from the West (especially raw materials). Falling interest rates also lead to greater private demand in emerging markets (EM) and generally promote more dynamic economic development.
Favourable conditions Due to Geopolitical Strife
Many emerging markets (EMs) are rich in raw materials, making them particularly attractive to Western countries that have few rare earth deposits. I also consider this to be the main reason for US assistance to Argentina, which has rich deposits.
However, in recent years, China has also made significant investments in many emerging markets in order to gain access to raw materials, and it continues to do so.
Countries Have no Friends, Only Interests. This Could Lead to Future Tensions, but Emerging Markets Could Benefit From Such Situations
Emerging market (EM) countries have long recognised that they are increasingly being courted by both China and Western countries. They therefore know that they no longer have to sell their mineral resources at rock-bottom prices and can demand a higher price.
The EM will not want to completely alienate either side, so the two major blocs will repeatedly find themselves in a bidding war, driving up prices. There is no alternative to this process unless geopolitical competition does not take place, which I cannot imagine happening, but it must at least be considered as a control variable.
In the long term, industrial companies in Europe will have to take note of rising raw material prices and find ways to deal with them. However, I am optimistic about energy costs, which I believe will decrease in the long term as electrification increases. However, on the path to cheaper energy, companies must improve their resilience. This means ongoing cost optimisation and creating liquidity reserves to ensure they can continue to procure resources when others run out of steam.
What we experienced three years ago could become the norm rather than the exception over the next 15 years. We can expect high commodity prices and high volatility, even to the point of scarcity, due to insufficient production (particularly of copper and aluminium, but also of silver and platinum). This means that stockpiling critical materials, which is costly, is a strategic factor that must be considered and financed, unlike in the past.
