The outlook for emerging markets is steadily improving. Inflation rates in these markets have been significantly more favourable over the past 15 years than in previous decades. Additionally, many countries have improved their structural conditions because their governments have either got their finances under control or have avoided making any major policy mistakes.
The commodity price recession from 2012 to 2022 severely impacted emerging markets, which supply many commodities to the global economy. This caused a sharp fall in direct investment. This led to a decline in demand for these currencies, causing their value to fall and inflation to rise higher on average than in ‘developed countries’, albeit not to the same extent as in previous decades.
In Brazil, private debt fell significantly due to interest rates remaining at an average level that was detrimental to the economy. In the absence of any prospect of economic improvement, these currencies and investment opportunities on the stock market and in bonds became an even less attractive prospect.
The Commodity Price Recession Is Over; We Are Now Entering a Period of Rising Commodity Prices
Although predicting a commodity boom may seem speculative, it is less random than it might appear. Commodity price cycles consist of long-term waves that include boom and bust phases, driven by the extent to which commodity companies control supply. Demand sets the tone, and commodity companies respond with a time lag. During the last commodity boom of the 2000s, companies responded to high demand by making enormous investments and carrying out a large number of mergers and acquisitions. However, this escalated into an unhealthy frenzy, and the subsequent hangover caused by excess capacity led to an epic price collapse.
The frenzy was followed by an epic hangover whose repercussions are still being felt today. Over the past 14 years, commodity companies have cut investment significantly. Unprofitable business areas have been sold off, mines have been closed, and reducing debt has been prioritised.
This means that, with global demand rising sharply, there is currently more demand than supply. This process is likely to intensify as the increase in demand is exacerbated by growing global uncertainty. While there is no fundamental deficit for many commodities (except platinum), there is a pronounced inelasticity in response to rising demand. Although demand can rise sharply within a year when stocks are built up significantly, it often takes 12–25 years for metals to be discovered, planned, applied for, approved, built and brought into production.
Companies can make fatal misjudgements about future business conditions if they are ignorant of this fact.
The Conditions for Emerging Markets Are Improving Significantly and in a Sustainable Way
The currencies of many emerging markets have weakened significantly over the past decade. Further weakening is currently only possible for India and Indonesia. Both countries have structural weaknesses that will continue to hinder their fundamentally positive development for some time to come. I am sceptical about the currencies of both countries for the time being, for different reasons.
However, I am cautiously optimistic about Latin America and the rest of Asia.
I can see particular opportunities for further currency appreciation in Brazil, Chile, Colombia and Mexico.
