An Emerging Markets Status Update

Over the last week, China (+8.7%), Russia (+8.1%), and Hong Kong (+6.0%) have outperformed in the EM equity space as measured by MSCI, while Czech Republic (-0.9%), Egypt (-0.9%), and Taiwan (-0.2) have underperformed.  To put this in better context, MSCI EM rose 3.4% over the past week while MSCI DM rose 1.0%.

Over the last week, China (+8.7%), Russia (+8.1%), and Hong Kong (+6.0%) have outperformed in the EM equity space as measured by MSCI, while Czech Republic (-0.9%), Egypt (-0.9%), and Taiwan (-0.2) have underperformed.  To put this in better context, MSCI EM rose 3.4% over the past week while MSCI DM rose 1.0%.

In the EM local currency bond space, Ukraine (10-year yield -128 bp), Russia (-58 bp), and Brazil (-25 bp) have outperformed over the last week, while China (10-year yield +7 bp), Thailand (+4 bp), and India (+4 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 5 bp over the past week.

In the EM FX space, RUB (+8.4% vs. USD), COP (+3.0%), and BRL (+2.2) have outperformed over the last week, while TRY (-1.3% vs. USD), PEN (-0.8%), and MXN (-0.5%) have underperformed.

Mexico sold a 100-year euro-denominated bond at an annual yield of 4.2%.  This is the longest-dated euro-denominated bond and Mexico is simply joining many other EM issuers that are borrowing in euros in order to take advantage of a weak euro/low Eurozone interest rate environment.  Pension funds and insurance companies are likely to be interested in such a long-dated asset to match up with long-dated liabilities.

Brazil President Rousseff picked Vice President Temer to lead her negotiating efforts with Congress.  Temer also heads coalition party PMDB, and expects to help get members of his own party to support budget-cutting efforts by the government.  With fiscal numbers continuing to worsen, the government has had to implement more austerity measures.  Fitch cut the outlook on its BBB rating from stable to negative.  We agree with this move, and it underscores the fact that Brazil does not have a lot of time to get its house in order.

Moody’s upgraded Egypt from Caa1 to B3 with a stable outlook.  This was Moody’s first upgrade for Egypt since 2012, and puts Egypt back in single-B territory for all three major rating agencies.  The move comes after Egypt recently announced plans to issue external debt for the first time since 2010.

Saudi Arabia increased its oil output in March to the highest level in at least twelve years.  Meanwhile, the EIA continues to report larger than expected builds in US oil inventories, which is more evidence of a continued supply glut in global oil markets.  Until oil and other commodity prices can stabilize, it will be hard for the EM exporting countries to get much traction. 

Moody’s raised the outlook on India’s Baa3 rating from stable to positive.  The agency noted that boosting investment and limiting inflation would be key to any ratings upgrade.  Growth should continue to pick up as the RBI is likely to continue cutting rates in 2015.

China investors are finally taking advantage of the Hong Kong-Shanghai link.  The market hit the quota for the past two days (CNY10.5 bln a day).  Over the past four months since the link opened, Chinese investors used less than 20% of their quota to purchase Hong Kong traded shares.  Last month, China expanded the link access to more Chinese funds and there is speculation that China will raise the quota.  The Hang Seng has risen to seven-year highs.

Emerging Markets: What has Changed is republished with permission from Marc to Market