Emerging Markets: What has Changed

(from my colleague Ilan Solot)

1) Easing in Hungary will be deeper than previously expected

2)  India steps up interventions even more 

3) Expectations for a Chinese “mini-stimulus” are growing, but markets are not responding 

1) Easing in Hungary will be deeper than previously expected. In this week’s meeting, the Hungarian central bank delivered the expected 25 bp cut, but it also issued an extraordinary statement with forward guidance suggesting that rate cuts could fall to as low as 3-3.5%. We knew the bank was dovish, but we expected them to retain the hawkish optionality at least until they could be sure that the sell-off in EM was behind us. In addition, the government continues to look for ways to alleviate the burden on households of FX-linked loans, but little concrete news has been announced so far.

2) India steps up interventions even more. The RBI imposed yet more restrictions on commercial banks' access to cash, thereby hoping to support the rupee. This comes on the back of rate hikes to the marginal standing facility and bank rate, tighter regulation on FX derivatives and restrictions on gold imports. As it stands, we still see space for the correction lower in USD/INR to continue, but we are keenly aware of the risk that policy overshoot can backfire. 

The risk is that it ends up weakening the rupee by scaring off foreign bond and equity investors. We would prefer if the government left markets alone for the time being and focused on much needed structural reforms. This would do a lot more good for India and INR than the measures described above.

3) Expectations for a Chinese “mini-stimulus” are growing, but markets are not responding. This idea is often framed as seeing the leadership giving markets a put option on growth. We doubt this is exactly the case, but it’s what many market participants have taken away from Premier Li Keqiang’s comments that the government would not tolerate GDP growth sub 7.0%. As we have noted last week, the government is already leaking plans of further stimulus and reform measures. 

Despite the news and the likely efforts to come, we find it difficult to get too excited about the near-term prospects for the Chinese economy. Indeed, all the talk about tax breaks for small businesses, more incentives to the railway sector cutting red tape for importers and exporters did little to support Chinese stocks this week.