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Friday, August 26, 2016 4:11:01 PM
Implications Of Declining Returns On Capital In EM
* August 26, 2016
Our EM strategists maintain their bearish view on EM risk assets based on poor credit and economic fundamentals. Persistent foreign capital flows are the biggest threat to their view.
Capital should flow to areas where the return on capital is (RoC) is high and rising. EM RoC has plunged in recent years and has not yet recovered. Importantly, the drop in RoC has not only been due to commodity prices.
The decline in RoC can be attributed to both cyclical and structural factors. The cyclical ones include: a slowdown in top line growth, strong wage/employee compensation growth, poor cost discipline (swelling costs during the boom years), as well as companies raising excessive capital and allocating capital inefficiently (the projects of the past several years have produced low/negative returns on investment). Meanwhile, structural factors include slower productivity growth and a general lack of structural regulatory reforms.
Overall, we do not detect many changes in EM cyclical and structural dynamics, except insofar as the rally in commodities prices over the past six months justifies a turnaround in commodities-producing EM economies.
http://blog.bcaresearch.com/implications-of-declining-returns-on-capital-in-em
• DiscoverGold
Click on "In reply to", for Authors past commentaries.
* August 26, 2016
Our EM strategists maintain their bearish view on EM risk assets based on poor credit and economic fundamentals. Persistent foreign capital flows are the biggest threat to their view.
Capital should flow to areas where the return on capital is (RoC) is high and rising. EM RoC has plunged in recent years and has not yet recovered. Importantly, the drop in RoC has not only been due to commodity prices.
The decline in RoC can be attributed to both cyclical and structural factors. The cyclical ones include: a slowdown in top line growth, strong wage/employee compensation growth, poor cost discipline (swelling costs during the boom years), as well as companies raising excessive capital and allocating capital inefficiently (the projects of the past several years have produced low/negative returns on investment). Meanwhile, structural factors include slower productivity growth and a general lack of structural regulatory reforms.
Overall, we do not detect many changes in EM cyclical and structural dynamics, except insofar as the rally in commodities prices over the past six months justifies a turnaround in commodities-producing EM economies.
http://blog.bcaresearch.com/implications-of-declining-returns-on-capital-in-em
• DiscoverGold
Click on "In reply to", for Authors past commentaries.
Information posted to this board is not meant to suggest any specific action, but to point out the technical signs that can help our readers make their own specific decisions. Your Due Dilegence is a must!
• DiscoverGold
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