Emerging markets facing alarming times, US recession may bring relief: Maneesh Dangi

Emerging markets facing alarming times, US recession may bring relief: Maneesh Dangi

Maneesh Dangi, Founder of Macro Mosaic Investing, suggests that the current situation in emerging markets is concerning due to various factors, but a recession in the United States might actually have some positive effects. Dangi’s analysis revolves around the following key points:

He notes that interest rates in the United States have been maintained at high levels due to domestic reasons, particularly to combat high inflation. These elevated interest rates have had a significant impact on emerging markets globally, primarily because they tend to lead to an appreciating US dollar.

The appreciation of the US dollar can have negative consequences for emerging markets. When the US dollar strengthens, it often exerts pressure on the currencies of other countries, making it more expensive for them to service their dollar-denominated debts. This, in turn, can lead to economic instability in emerging markets.

Despite the turbulence in global financial markets, Dangi observes that the Federal Reserve (the Fed) has consistently reiterated its commitment to keeping interest rates higher for an extended period, indicating that a rate cut is unlikely in the near future.

Dangi suggests that the solid state of the US economy, as reflected by strong macroeconomic indicators, will deter the Fed from implementing rate cuts. Consequently, this raises concerns about the possibility of a hard landing for emerging markets, as they continue to grapple with the challenges posed by high US interest rates and an appreciating US dollar.

In the context presented, US Treasury yields had recently surged to elevated levels before experiencing a slight retreat. The 10-year Treasury notes reached a fresh 16-year high at 4.884 percent, while 30-year Treasury yields surpassed 5 percent for the first time since August 2007.

Maneesh Dangi, in his recent interaction, has emphasized a substantial disparity between fiscal and monetary policies within the United States. This divergence, he suggests, is a significant source of turbulence in global financial markets. Fiscal policies pertain to government spending and taxation, while monetary policies are controlled by the central bank (in this case, the Federal Reserve) and encompass interest rates and money supply management.

The consequences of this policy divergence extend beyond the United States. It has the potential to introduce uncertainty and volatility into global financial markets, influencing investment decisions and capital flows both domestically and internationally.

Furthermore, Dangi forecasts that emerging markets across various economies will continue to encounter challenges. These challenges may stem from factors such as the high interest rates in the United States, the strengthening US dollar, and the broader instability and unpredictability characterizing global financial markets. In this environment, emerging markets face ongoing headwinds that could impact their economic prospects.

In the context of a potential US recession, Maneesh Dangi shares his insights on the global economic landscape. He suggests that while a US recession might bring some relief domestically, it could spell trouble for most emerging markets. According to him, Asian and European markets are poised for turbulent times in the coming months, driven by a combination of factors.

One significant factor contributing to this turbulence is the surge in energy prices, which can strain economies, especially those heavily reliant on energy imports. Rising energy costs can lead to increased production expenses and inflationary pressures, affecting both businesses and consumers.

Another point of concern is China’s stressed balance sheet. China’s economic challenges, particularly regarding its financial stability and high debt levels, have the potential to send shockwaves through global markets, particularly in Asia where China plays a pivotal role in trade and finance.

Additionally, Dangi highlights the impact of a stronger US dollar, which can make it more expensive for countries with dollar-denominated debt to service their obligations. This currency pressure can put strain on the financial stability of these nations and lead to economic challenges.

Dangi also suggests that accidents or economic downturns in most economies outside of the United States are not primarily driven by income issues but are related to balance sheet problems. This indicates that the financial health and stability of institutions and governments are critical factors contributing to economic challenges.

Furthermore, he points out the interconnectedness of global credit markets with movements in US Treasury Bonds. When interest rates rise, it can lead to higher borrowing costs across various credit markets, from bank loans to mortgages. This, in turn, can impact consumption, manufacturing, and production as the cost of capital increases. In essence, Dangi underscores the global ramifications of economic events and policy decisions, emphasizing the need for a comprehensive understanding of international financial dynamics.

Maneesh Dangi provides further insights into India’s economic situation and the impact of global economic trends:

Dangi acknowledges that, at the moment, India enjoys relatively cleaner corporate and household balance sheets. Unlike many other economies that have faced balance-sheet-related challenges since the 2008 financial crisis, India’s balance sheets are not stressed. This suggests that India has managed to maintain a healthier financial position, both in terms of corporate finances and household debt.

However, he anticipates an income slowdown in the Indian economy due to specific factors. High interest rates and surging crude oil prices are expected to affect the purchasing power of retail households. When interest rates are elevated, borrowing costs rise, which can discourage spending and investment. Additionally, higher crude oil prices can lead to increased fuel and energy costs, impacting consumer budgets and overall economic activity.

Regarding the mortgage market in the United States, Dangi notes that the current mortgage rate has reached a 30-year high at 7.8 percent. However, he clarifies that most mortgages in the US are fixed-rate mortgages. Fixed-rate mortgages have interest rates that remain constant throughout the loan term and are less sensitive to fluctuations in interest rates. This is in contrast to Europe, where variable-rate mortgages are more common, and borrowers may face higher interest payments when rates increase.

Dangi’s comments highlight the unique economic dynamics at play in India, where balance sheets appear to be in better shape compared to some other economies. However, he also underscores the potential challenges the Indian economy may face, including the impact of high interest rates and rising crude oil prices on household consumption. Additionally, he provides context for the mortgage market in the US and its sensitivity to interest rate changes, which differs from the European mortgage market.