Dividends and Emerging markets get burned by the global bond bonfire

The word inflation is beginning to raise its head and inflation means higher interest rates and higher interest rates mean alternatives to stocks. It is never ending story line because it is true. One of the reasons it is true is the world is awash in bonds.

In an article by Marc Jones and Tom Arnold of Reuters, they took a look around the world to examine the debt levels of countries. Everyone knows about the G7 countries and how much debt they have, but what do other countries debts look like. The reason it is important are 2 fold: they push up borrowing costs and cuts the premium existing debt offers investors compared to the ultra safe and liquid US Treasuries.

Bank of America estimates emerging markets will sell more than 3/4’s of a trillion dollars worth of debt this year – $210 billion by governments and $550 billion by corporates.

Brazil and South Africa are countries whose combination of persistent weak growth, rising public debt, very steep yield curves with very high long-term real interest rates has become a big source of concern said David Lubin, Citi’s managing director and head of emerging markets economics. Mexico might also be on the list.

Ricardo Adrogue, head of Barings sovereign debt and currencies group, said we could be at the door of a big, big economic boom. Some of the these countries that seem hopeless today could actually be okay.

Some of the countries might not be so lucky, such as Ethiopia who is about to become a test case for the new Group of 20 Common Framework debt relief plan, which stipulates private creditor debt must also be restructured, meaning the government has to default.

In May, Belize was expected to default in May. In June and July Laos and Sri Lanka have key payments. JPMorgan lists 16 countries at risk for defaulting from Cameroon to Tajikistan sitting on $61.4 billion in debt.

Tellimer’s senior economist Patrick Curran has a list which includes Jamaica, Tunisia, Ecuador, Sri Lanka, Belarus, Ethiopia, Laos, Bahrain and Oman.

Countries such as Mexico, Jamaica, Panama, Mauritius, Montenegro, Jordan, and Fiji where tourism accounts to 10% of GDP, will wonder whether vaccines will come quickly enough to save their busy seasons this year.

Linking to dividend paying stocks, many large corporations have operations outside America and there are always good and bad aspects to it. The good is more goods and services are sold and the company has a diversified income streams which allows stability in earnings. The bad is not all companies operate the same or similar to America and risk and returns come into play. Unless the company has moats or is near monopoly, running a profitable company over the years requires good management and execution a strategic plan on a consistent basis.

There are more questions than answers, till the next time – to raising questions.

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