Over the last week, Hungary (+2.1%), Mexico (+1.9%), and Malaysia (+1.9%) have outperformed in the EM equity space as measured by MSCI, while Russia (-2.1%), Colombia (-1.9%), and Turkey (-1.2%) have underperformed. To put this in better context, MSCI EM rose 0.5% over the past week while MSCI DM rose 0.4%.
With some of the big near-term uncertainties gradually being cleared up (Greece and Ukraine), we think EM assets could get some traction this week. That said, EM FX will remain vulnerable and liable to selloffs should the dollar bullish-trend resume in earnest. The outlook for the FED will be the focal point now, and Yellen’s testimony this week could be decisive. We think the needle will move back towards a June hike. This may be a negative development for EM given that some investors are pricing in a later hike.
There are too many near-term uncertainties to make an outright directional call on EM. Between a looming deal for Greece, a fragile agreement in Ukraine, the bounce in commodity prices and fall in the dollar, we prefer to focus on market-neutral relative value strategies.
Over the last week, Russia (+10.3%), Hungary (+6.1%), and Czech Republic (+2.3%) have outperformed in the EM equity space as measured by MSCI, while Turkey (-3.5%), Korea (-3.1%), and Colombia (-3.0%) have underperformed. To put this in better context, MSCI EM rose 0.6% over the past week while MSCI DM rose 1.6%.
The rebound in oil prices and the sliver of hope of a peace treaty in Ukraine is serving to soften a few of the trends in EM assets in recent months. We doubt that this is the start of a new trend, and more likely just a positioning adjustment. Although oil can continue to correct higher, we think the downward pressure will remain intact. And even if an agreement in the Ukraine is reached, the implementation and longevity of a deal will be highly debatable.
Over the last week, Russia (+12.2%), Hungary (+7.2%), and UAE (+6.3%) have outperformed in the EM equity space as measured by MSCI, while Turkey (-4.0%), Hong Kong (-0.8%), and the Philippines (-0.2%) have underperformed. To put this in better context, MSCI EM rose 1.6% over the past week while MSCI DM rose 3.0%.
Waning risk appetite along with growing uncertainty in Europe about Greece have set up emerging markets for a difficult week. In addition, the wave of monetary policy easing and expectations for further easing by EM central banks has removed another buffer against further currency depreciation. This will become especially important if the trend of dollar appreciation continues – which we expect to happen, even if not immediately.
Over the last week, Qatar (+3.1%), Czech Republic (+1.8%), and Poland (+1.5%) have outperformed in the EM equity space as measured by MSCI, while Russia (-10.9%), Brazil (-6.4%), and UAE (-5.8%) have underperformed. To put this in better context, MSCI EM fell -3.0% over the past week while MSCI DM fell -1.2%.
Emerging markets seem to be on a slightly better footing after a few turbulent weeks. Many EM currencies were able to appreciate against the dollar in the wake of the ECB’s QE announcement, despite most major currencies depreciating. Meanwhile, EM fixed income markets were able to benefit from the trend lower in yields and equity markets were buoyed by the global rally and the stabilization in energy markets. We doubt that weakness in EM is entirely behind us, but it appears as if we are entering into a stage of greater differentiation.
Over the last week, Hungary (+8.8%), Russia (+7.2%), and Chile (+5.7%) have outperformed in the EM equity space as measured by MSCI, while the Philippines (-0.9%), Czech Republic (-0.6%), and UAE (-0.1%) have underperformed. To put this in better context, MSCI EM rose 3.6% over the past week while MSCI DM rose 2.2%.
