After an eventful few sessions, EM assets this week will be wedged between a US holiday on Monday and expectations ahead of the ECB meeting on Thursday. Bar any unexpected developments, we doubt there will be a lot of conviction for trades in the near term.
Over the last week, Egypt (+6.4%), UAE (+3.4%), and Hong Kong (+3.2%) have outperformed in the EM equity space as measured by MSCI, while Peru (-6.3%), Russia (-4.8%), and Colombia (-4.4%) have underperformed. To put this in better context, MSCI EM rose 0.5% over the past week while MSCI DM fell -1.3%.
EM is starting the week facing several familiar cross-currents. The dollar is strengthening again, oil prices are still falling, but equities are moving higher. This constellation seems to suggest a continuation of our call further weakness in EM, but for Asian assets to outperform in the short-term.
Over the last week, Russia (+10%), China (+1.7%), and the Philippines (+0.3%) have outperformed in the EM equity space as measured by MSCI, while Colombia (-7.0%), Hungary (-6.7%), and Czech Republic (-5.4%) have underperformed. To put this in better context, MSCI EM rose 0.2% over the past week while MSCI DM fell -1.4%.
EM has started the year by extending many of the trends present towards the end of last year. The ruble is on the defensive along with Brazilian assets, while the Shanghai Composite continues to rally. The continued fall in oil prices will also ensure that the trading dynamics of importers vs. exporters will remain intact. But soon, we will be reaching the point in which secondary impacts will start to be counted as well. For example, the potential boost to the US economy from lower oil prices could counter some of the negative effect of lower energy exports for Mexico.
EM currencies stabilized after the FOMC meeting last week. Yet the Fed clearly signaled that it remains on track to start hiking rates around mid-2015. While Yellen’s guidance was taken as dovish (tightening won’t be at a predictable, “measured” pace), we still feel the looming Fed tightening cycle remains negative for EM. Furthermore, commodity prices remain soft. This and the upcoming turn in the US interest rate cycle should maintain downward pressure on EM currencies through H1 2015.
Over the last week, Colombia (+9.5%), Mexico (+1.9%), and Chile (+0.1%) have outperformed in the EM equity space as measured by MSCI, while Hungary (-9.6%), Turkey (-7.3%), and Russia (-5.8%) have underperformed. To put this in better context, MSCI EM fell -1.0% over the past week while MSCI DM fell -0.2%.
EM currencies remain soft ahead of the FOMC meeting Wednesday. The Fed is widely expected to modify the language in its forward guidance, which would be consistent with the first rate hike that is expected around mid-2015. This would be unequivocally negative for EM. Indeed, lower commodity prices and the looming turn in the US interest rate cycle are likely to maintain downward pressure on EM currencies well into next year.
1) Indonesia’s recently elected President Jokowi is facing his first major popular challenge
2) Turkey raised the daily dollar auction amount from $20 mln to $40 mln
3) There are signs of some growing concern over currency weakness in Mexico
4) Brazil central bank chief Tombini is already changing the tune from the statement of the last COPOM meeting
5) Moody’s upgraded the Philippines one notch to Baa2 with stable outlook
6) Ethiopia raised $1 bln via a debut 10-year Eurobond sale, amidst strong demand
In 2001, the term BRIC was coined by Jim O’Neill, formerly with Goldman Sachs, who had used the acronym in his thesis on emerging markets of Brazil, Russia, India and China. With inclusion of South Africa in 2010, BRICS was formed. It started to reflect the strength of the emerging markets across the globe. Together BRICS comprises of 40% of the world’s population, 21% of the world’s GDP and 30% of the global territory. To many, BRICS had only been holding only meetings, never reaching on any big development or funding plans.
