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China is the proxy for all emerging markets
The big investment money in the world stems from the developed worlds of the US and Europe. And investors from these nations invest in emerging markets, and emerging market corporate bonds, to get better returns on their investments.
And the more risk that’s associated with an investment, the higher the returns these investors expect to receive on their money.
Now the problem for us here in South Africa is, much of the developed world treats China as a proxy for all emerging markets. So when Chaori Solar can only pay 4 million Yuan of the 89.8 Yuan payment due on its bonds, developed world investors get worried.
They fear that the defaulting will spread to other companies and other emerging markets. So they begin to sell their emerging market bonds. And that crushes the price of these bonds.
In fact, bond prices have been hit so hard by this move, many companies that were due to sell bonds to raise funds have actually cancelled their bond sales because the interest they’ll have to pay on these is simply too high.
But it gets worse still for bond investors…
Emerging market bonds will get a double hit
What’s scary for bond investors is, Chinese defaults aren't the only thing you need to worry about.
You see, as the US tapers its stimulus programme, the interest rates on US bonds will rise. And this means investors no longer have to go to emerging markets to get increased interest rates.
That means emerging bond prices will fall even further.
So with worries in China and increasing rates in the US, it’s likely that bond prices will fall for the remainder of 2014. And that means if you want to protect your wealth, now is not the time to buy bonds.
Until next time,
Here’s to staying ahead of the game.
Warren Jeffery
This week's economic calendar:
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