This week, we look at four important issues: :
- Emerging market currencies at risk in 2024. Although global financing conditions eased in 2023, some emerging markets still face severe currency risks due to persistent balance-of-payments imbalances. Our watch list for a significant currency depreciation or devaluation in 2024 includes Argentina, Egypt, Kenya, Nigeria, Pakistan, Tunisia and Türkiye. Last week Nigeria became the first country this year to experience currency derailing. Further analysis from unofficial market exchange rates reveal additional markets at risk, namely Angola, Bangladesh, Bolivia and Myanmar. Weakening currencies raise the risks of sovereign default in countries with high levels of foreign currency-denominated public debt.
- Corporates’ inventories: anatomy of a fall. After the pandemic, corporates built up strong inventories to cope with pent-up demand and to mitigate supply-chain risks. As a result, all industrial sectors (except energy) in Western Europe have recorded an upsurge in the levels of inventory relative to sales (22.6% on average for 2023, almost 4pps higher than in 2019). But as demand is falling, inventories have started to weigh on financials and pricing power. Inventories cut growth by -0.8pp in the UK, -0.4pp in the US and -0.3pp in France in 2023. In Germany, they contributed positively (+0.1pp) but a turnaround is looming in 2024 and the fall should continue elsewhere.
- Equity markets: The costs of concentration risk. Concentration risk is intensifying in equity markets as a small cadre of leading companies increasingly dominates returns. In the US, the top 10 companies by market capitalization (representing 30% of the S&P500), contributed to 70% of the index's returns in 2023. In Europe, the top 10 companies were also responsible for the lion's share of returns (75-90%). In each country, a single company often accounts for 10% of the respective equity index. In this context, the advantages of diversification are diminishing. While broad equity indices can still offer a buffer against market downturns, investors need to broaden their diversification strategies considering factors such as company size, geographic location and investment style.
- The EU’s new climate target: 90% less emissions by 2040. Climate-related damages have already cost Europe EUR170bn over five years. The European Commission’s new strategy includes significant carbon-capture goals, aiming to sequester up to 280mn tons of CO2 annually by 2040. But the effectiveness and scalability of carbon-capture and removal technologies are debatable, and the new strategy lacks plans for phasing out fossil fuels to lend credibility to emission-reduction targets.