Booming commodity prices weigh heavily on emerging economies

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Those investors who have committed capital to the commodity price story have continued to prosper in the first few weeks of this year. However, for both the household and corporate sectors in many developing countries, soaring prices for raw materials and foodstuffs are becoming something of a nightmare, as they represent a significant deterioration in financial conditions.

Guest post by FxPro

In India, input costs are leaping higher, weighing heavily on profit margins and consequently corporate earnings. India’s Sensex 30 Index is down more than 12% already this year, the worst performance among the major emerging world bourses. According to the Securities and Exchange Board of India, global funds sold a net $1.1bn of Indian equities in January, after net purchases last year of $29.3bn. China likewise is extremely conscious of the danger posed by accelerating inflation, with the PBOC already lifting key interest rates and aggressively raising bank reserve requirements over recent months in an attempt to prevent rampant liquidity growth from fanning the flames of inflation. Rising inflation in turn is generating growing demands for higher wages. According to a recent survey conducted by a Chinese think-tank, China now has the second highest labour costs in Asia.

Interestingly, investors appear increasingly cognisant of the growing threat of inflation in the developing world. Emerging market equities have substantially underperformed equities in the major advanced economies this year; likewise, both bonds and currencies from the emerging world have underperformed those in the developed world. It would not be surprising if this trend continued for a while longer.

Michael Derks, chief strategist, FxPro


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