Emerging Markets: What has Changed

(from my colleagues Dr. Win Thin and Ilan Solot)

1) Brazil central bank has paused its tightening cycle

2) The election of Petro Poroshenko as President of Ukraine should help lower tensions with Russia

3) The South African government is launching a task force to try to resolve the mining dispute with a new Mining Minister

4) The Thai army seems to be signaling a longer than expected period before civilian rule is re-established

Over the last week, Argentina (+3.9%), Pakistan (+2.8%), and Czech Republic (+1.8) have outperformed in the EM equity space in local currency terms, while Egypt (-5.6%), Philippines (-2.3%), and Poland (-0.7%) have underperformed. 

In the EM local currency bond space, Ukraine (10-year yield -35 bp), Hungary (-32 bp), and Singapore (-14 bp) have outperformed over the last week, while South Africa (10-year yield +14 bp), Thailand (+13 bp), and Indonesia (+5 bp) have underperformed. To put this in better context, the 10-year UST yield was down 12 bp over the past week. 

In the EM FX space, CLP (+0.8% vs. USD), PEN (+0.6), and TWD (+0.4%) have outperformed over the last week, while ZAR (-1.1%), INR (-1.0%), and RUB (-0.9%) have underperformed.

1) As widely expected, the Brazilian Central Bank kept rates steady at 11.0%, after 375 bp of hikes. The communiqué included the language, “…the COPOM decided unanimously, at this moment, to keep the Selic rate…” For us, the “at the moment,” part is intended to target inflation expectations by reaffirming that the committee is ready to hike again if needed. However, it does not indicate real intent. While we don’t discard residual tightening this year (in the case of an external shock), our view is that rates will remain steady for the time being. Even though rates have likely peaked for now, we still think Brazil yields (both nominal and real) are high enough to attract foreign investors. 

2) The election of Petro Poroshenko as President of Ukraine should help lower tensions with Russia. 

However, there will still be pockets of problems. In the days after last weekend’s vote, renewed violence was seen in some eastern cities. For instance, pro-Russian rebels shot down a Ukrainian military helicopter today near Slovyansk. Elsewhere, a natural gas deal between Ukraine and Russia is being brokered by the EU, but a deal has not been struck yet. On the other hand, EU officials met and decided to put off further sanctions on Russia in light of the recent easing of tensions.

3) The South African government is launching a task force to try to resolve the mining dispute with a new Mining Minister. The strike of 70,000 workers has been ongoing since January, the longest in the country’s history. The new minister, Ramatlhodi, has a tough job ahead and we are not especially optimistic. This week’s release of a lower-than-expected GDP print for Q1 (at -0.6% q/q) serves to underline the damage this is causing. Mining declined -24.7% annualized, chipping 1.3% off GDP growth that was reported at -0.6% annualized. Despite high inflation, we think the weak growth outlook will push SARB tightening further out.

4) The Thai army seems to be signaling a longer than expected period before civilian rule is re-established. Official said that a return to a civilian government soon is “impossible” due to the threat of further violence, which could prevent “free and fair” elections. Instead of calming the situation, the army coup has brought on street protests calling for civilian rule. The economy remains very weak, and we do not expect a quick turnaround as long as the political outlook remains unsettled. As such, we think Thai assets are likely to underperform for the time being.