Emerging Concerns

Broadly speaking, nations typically fall into two economic categories: developed or emerging.  Although some readers might ask about frontier economies, Atlas will stick to these two comprehensive terms, choosing to deemphasize nuance for the sake of time and space.  Developed economies generally have per capita output of at least $12,000 per year, while those falling below this arbitrary requirement are labeled emerging.  For some context, America’s per capita output in 2016 was $57,500.  Additionally, other qualitative measures can be added as a necessary condition for being considered developed, especially in countries with large wealth distribution inequalities, but for the sake of this note, it will be easier to just think in terms of per capita output.

Emerging nations have been taking up lots of space in the financial headlines.  Stories regarding Turkey and Argentina are often “above the fold” on various websites.  Concerns over debt levels are growing.  More specifically, worries regarding dollar-denominated debt are accelerating.  According to this article from Business Insider, most developing economies have more non-bank debt denominated in U.S. dollars as a percentage of their output than before the Great Recession.

Servicing the debt (i.e., making interest payments) is one thing, but many loans are maturing this year and next.  Roughly $700 billion will need to be repaid or refinanced in the next 16 months.  Unfortunately, many of these economies are beginning to slow, and their currencies are depreciating against the greenback.  Slower output hurts a firm’s ability to pay which in turn causes lenders to become less willing to loan money.  Adding to the difficulty, foreign currency values have been generally weaker lately, so repaying dollar-denominated debt is getting more expensive.  Those with collapsing currencies (e.g., Turkey and Argentina) suffer even further.

Atlas isn’t looking to scare readers right before the weekend.  Instead, we want you to know we are aware of potential pitfalls.  Headlines do not drive our investment decisions.  Alternatively, we pay attention to market movements, choosing to reduce/avoid exposure to areas showing weakness.  While portfolio management will never be a perfect process, this allows us to tilt the investments we make toward those assets with rising tendencies.