Semester 2 Week 8

Hey Legend!

Happy Monday, hope you’re thriving and uni is treating you well 🥳 !

Congrats for making it through the infamous student union election week 😅, an annual phenomenon where marketing majors are beaten at their own game by arts students 😇.

We know you’ve been locking in on the study grind 🔨(hopefully). Take a breather from the books 📚, come have a chat 👋and recharge with a caffeinated brew on us ☕ — this Friday @ Mid Square Coffee from 12 pm to 3 pm, you deserve it champ 💚

The Numbers

The Roundup

India is positioning its advanced sectors in line with the US, while the Australian treasurer announced a diplomatic visit to Beijing, this week’s hot topic examines the impact of fed rate cuts on emerging market bonds. Let’s get into it.

India

India is advancing its education 🎓 and technology 🤖 sectors through global collaborations, while steady economic growth 📊 is driven by investments in renewable energy 🌞 and defense partnerships ✈️.

• India and the U.S. have signed an MoU between the IIT Council and American universities to create the India-U.S. Global Challenges Institute, backed by a $10 million 💰 investment. This initiative will foster joint research in areas like sustainable energy, AI, quantum science, and healthcare research 🧬, positioning India as a global leader in cutting-edge education and technology​.

• India’s GDP growth is projected at 6.1% 📈 for FY 2024-25, driven by large infrastructure projects 🏗️ and rising private consumption. The government's Dearness Allowance hike 📈 for 11 million employees is expected to boost domestic spending 🛍️. Additionally, increasing FDI inflows into semiconductors 💻 and renewable energy 🌞 sectors further reinforce India as a prime destination for global investments.

• India’s stock market continues to thrive, with 170 million demat accounts 🏦. The upcoming Bajaj Housing Finance IPO has already shown a ₹55 grey market premium 📊, attracting widespread investor attention. The renewable energy sector is booming, led by Inox Wind, which saw a 346% 🚀 surge in the past year, showcasing strong market confidence in green energy innovations.

• India has significantly strengthened its defense and space partnerships with the U.S., including the agreement to manufacture GE F-414 jet engines ✈️ in India. Both countries are also working on AI collaborations 🤖 and space missions 🚀, including asteroid detection and planetary defense 🌍, reinforcing India’s strategic global role.

China

This week, the Chinese government has been busy hosting African leaders 🌍, announcing investigations 🔎on Canadian imports 🚢 and forming a new biggest brokerage 📈📈 in China 🥇, while preparing to host the Australian Treasurer on an upcoming diplomatic visit.

• China hosts over two dozen African leaders 🌍 at the 3-day Forum on China-Africa Cooperation. This summit serves to strengthen 💪 Chinese political and economic ties with African nations, in an effort to increase China’s presence and influence in an increasingly multipolar geopolitical landscape. Strengthening the ties with African nations has become a growing political priority 1️⃣ for China as they seek allies on contentious issues such as control of Taiwan.

• China retaliates against Canada’s latest tariffs by announcing investigations 🕵️🔎 into Canadian imports of agricultural 🚜 and industrial 🏭 products to determine whether they are being priced unfairly 🏷️ in China. This follows our report in last week’s newsletter of Canada’s hefty tariffs on Chinese EV’s and steel, following a trend set by the EU and USA.

• Australian Treasurer Jim Chalmers has confirmed that he will visit Beijing ✈️🌏 to hold “strategic economic dialogue 🎙️with [his] Chinese counterparts”, during the last week of September. It will be the first time that an Australian treasurer has visited China in 7 years🗓️🕰️. It is likely Chalmers will raise the issue of China’s continuing restriction of imports of Australian lobster 🦞, while China will likely bring up Australia’s tightening foreign investment rules 💰🚢👨‍⚖️🙅.

• Two state-backed Chinese brokerages 🏢 📈📉have merged to form the biggest brokerage in China. Via a share swap🔁, broker Guotai Hunan acquired smaller rival Haitong, in a move that Beijing hopes will result in more mergers across the industry and consolidate the markets and restore greater profitability 💰 to what is currently a highly competitive domestic brokerage industry.

Hot Topic 🔥

Fed rate cuts have the potential to revive bond flows to emerging markets

The tide is finally turning. After several years of boom-bust cycles of capital flows into emerging markets, they are finally displaying resilience during the recent wave of monetary tightening.

Policy frameworks and healthy foreign reserves have helped shield many countries from the worst effects. However, the most vulnerable economies have not been spared, facing disproportionately high borrowing costs as central banks in advanced economies hiked rates, as seen in the slowdown of Eurobond issuance

Eurobonds are a key financing tool for emerging markets,  issued in major currencies like the USD or euro. For economies with pre-mature domestic capital markets, these instruments are a lifeline, allowing them to tap foreign investors for more diversified funding. However, they are exposed to currency fluctuations and are very sensitive to global interest rates.

The issuance of Eurobonds by emerging and developing economies fell drastically in 2022-23, dropping to an annual $40 billion - a staggering 70% decline from the previous two years. 26 countries, including Bolivia and Mongolia, faced net outflows totalling $58 billion, as maturing debt outweighed new bond sales. This shift signals debt-strapped countries are struggling to re-finance in an increasingly costly environment.

But what exactly caused this slowdown? Some argue it was the tightening of global financial conditions and existing vulnerabilities within these economies. Countries grappling with fiscal deficits and external imbalances were most affected, turning to austerity measures, such as cutting investment and reducing imports.  Others took a riskier move, digging into their foreign reserves.

The link between Eurobond issuance and advanced economy interest rates is clear, most notably being the US 10-year treasury yield. During the pandemic, when borrowing costs plummeted, emerging markets seized the opportunity to issue debt at low rates. But as the Fed and other central banks hiked rates in response to inflation, borrowing costs for riskier economies skyrocketed. Consequently, Eurobond issuance in many lower-rated countries dried up.

The recent rate cuts by the Fed may swing the pendulum back. With several central banks in advanced economies beginning to ease monetary policy, conditions are improving for emerging market borrowers. In the first quarter of 2024, Eurobond issuance rebounded to $40 billion, with countries like Benin re-entering the market. If the Fed continues to cut rates, we could see a revival in Eurobond issuance and, with it, a broader recovery in capital flows to emerging economies.

At present the outlook is optimistic. But whilst the worst of monetary tightening is in the past, vulnerable economies will need to be very demure and very mindful when it comes to the balancing of renewed capital flows in light of the risk of future shocks.

Have a good rest of the week Legend 😊 — we look forward to seeing you at our coffee catchup ☕ this Friday 🤝

Best regards,

EMN 💚