At some point in the next two quarters, the global backdrop for
emerging market bonds will turn increasingly gloomy.
The global economy is in a stuttering recovery. For one thing,
corporate America has to restore profit margins. So it has to cut
wages, which it didn't do during last year's phoney recession.
Second, the US housing market - a mainstay of household wealth
creation during the US equity market meltdown - won't keep on
working the same magic.
Despite a slow global recovery, central banks will gradually
tighten monetary policy. And global bond markets are also going to
have to price in the US as a much bigger borrower. So interest
rates will rise and yield spreads on emerging-market bonds will
widen.
That's the most likely prospect. There is an even darker one, to
which I ascribe a 40% probability. US equities will head south as
corporate profit growth comes in way below...
