Emerging Markets: What has Changed

(from my colleagues Dr Win Thin and Ilan Solot)

1) China churns out more measures

2) The Bank of Israel increased the level of FX reserves that it considers adequate

3) Nigeria has a new president

4) Chile is joining Mexico in setting a hawkish tone

5) Brazil’s president Rousseff’s popularity fell off a cliff

6) Thailand’s military junta ended martial law after more than ten months

Over the last week, Brazil (+8.4%), Russia (+8.4%), and UAE (+8.0%) have outperformed in the EM equity space as measured by MSCI, while Hungary (-2.3%), Korea (-0.2%), and Singapore (flat) have underperformed. To put this in better context, MSCI EM rose 3.7% over the past week while MSCI DM fell -0.1%.

In the EM local currency bond space, Brazil (10-year yield -26 bp), Ukraine (-22 bp), and Russia (-20 bp) have outperformed over the last week, while Chile (10-year yield +13 bp), China (+7 bp), and Indonesia (+5 bp) have underperformed. To put this in better context, the 10-year UST yield fell -9 bp over the past week. 

In the EM FX space, BRL (+3.3% vs. USD), RUB (+2.0% vs. USD), and CLP (+1.4% vs. USD) have outperformed over the last week, while COP (-0.4% vs. USD), CZK (-0.3% vs. EUR), and ARS (-0.2% vs. USD) have underperformed.

1) China churns out more measures. PBOC Governor Zhou hinted at additional stimulus and the central bank lowered the down payment required for some second home buyers. After increasing the QFII quota for a large US asset manager last week, officials now indicate that money managers no longer need to be part of QFII program in order to invest in HK shares through the exchange link. 

2) The Bank of Israel increased the level of FX reserves that it considers adequate. The level was raised from $65-90 bln to $70-110 bln. This means that the bank will probably have to speed up its FX purchases, and underscores are view that a weaker shekel is a major policy lever. FX reserves increased by $4.3 bln to $86.1 bln in 2014, and have fallen slightly since. The measure seems largely preventative, since the shekel has been largely range bound for the last several months. We also think further policy measures are likely. 

3) Nigeria has a new president. General Buhari beat incumbent President Goodluck Jonathan by 2.5 million votes. Despite some fraud allegations, this seems to be a positive step forward for the country’s democratic process, not least because it’s the first time since independence from Britain in 1960 that a sitting president has been defeated. The weakening economy, made worse by lower oil prices, played a big role in the outcome, as well as Jonathan’s handling of the Boko Haram security threats. This was Buhari’s third attempt at the presidency. He is a former military ruler (1984-85), deposed in a coup but ran on a platform of discipline and incorruptibility.

4) Chile is joining Mexico in setting a hawkish tone. Central bank President Vergara is now talking about a normalization of the policy rate even as inflation remains above the target. The bank said in its quarterly monetary policy report that the policy rate will be “somewhat” higher than that forecast by analysts (who forecast no move this year). This suggests that Chile could follow the Fed in raising rates later this year.

5) Brazil’s president Rousseff’s popularity fell off a cliff. The latest poll from Ibope showed that her government’s positive approval rating fell to just 12% in Mach, compared with 40% in December. This is the worst figure in the series’ history. Inflation was cited as a major area of concern by those polled, as well as interest rate policy. Even the area of education, one of the president’s main focuses for the second term, saw a substantial increase in disapproval rating. Poor fiscal numbers for February led the government to pledge more spending cuts, which in turn should weigh on its popularity even further.

6) Thailand’s military junta ended martial law after more than ten months. However, the government said it would invoke Article 44 of the constitution "with an aim to deploy military officers in tasks related to maintenance of national order." Basically, this means that despite the end of martial law, Thailand’s leaders will have fairly open authority to override any of the three branches of government in the name of security.