Emerging Markets: What has Changed

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

1) The Brazilian central bank indicated less FX swaps and more monetary tightening 

2) After a delay, Israel has a new government 

3) Saudi Arabia will open up its stock market to foreign investment 

4) The Argentine political outlook has gotten more interesting 

5) Vietnam devalued the dong for a second time in 2015 

Over the last week, Chile (+2.8%), Mexico (+2.2%), and Russia (+2.1%) have outperformed in the EM equity space as measured by MSCI, while China (-4.7%), UAE (-3.8%), and the Korea (-2.9%) have underperformed.  To put this in better context, MSCI EM fell -1.3% over the past week while MSCI DM rose 0.7%.

In the EM local currency bond space, Russia (10-year yield -14 bp), Korea (-2 bp), and Turkey (-1 bp) have outperformed over the last week, while Indonesia (10-year yield +48 bp), Thailand (+30 bp), and Hungary (+26 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 10 bp over the past week.

In the EM FX space, MXN (+1.2% vs. USD), CLP (+1.1%), and RUB (+0.9%) have outperformed over the last week, while THB (-1.6% vs. USD), KRW (-1.5%), and IDR (-1.2%) have underperformed.

1) The Brazilian central bank indicated less FX swaps and more monetary tightening.  Late last week, the central bank decided to reduce the rollover amount of its FX swaps, which effectively support the currency.  The central bank made the move after the dollar’s enthusiastic break below BRL 3.00, suggesting a smaller concern about further BRL weakness.  Part of this is probably related to building expectations for another 50 bp increase in rates at the June 3 meeting.  This is a view that the minutes to the previous meeting only reinforced – or at least did little to persuade markets otherwise.  

2) After a delay, Israel has a new government.  The outlook became cloudy after the surprise resignation of Foreign Minister Liberman this week, and withdrawing his party Yisrael Beiteinu (with 6 seats in the Knesset) from joining a ruling coalition.  Without Yisrael Beiteinu, Prime Minister Netanyahu was forced to pull in Jewish Home, whose leader Bennett is pushing for the post of Foreign Minister in return.  The makeup of the parties is clearly right-wing and religious.  The coalition will hold only 61 seats, a bare majority that will make it very difficult to push through legislation.  

3) Saudi Arabia will open up its stock market to foreign investment.  Announced rules include a 49% foreign ownership limit on a company, while only institutional investors with a minimum $5 bln AUM will have direct access to the market.  Saudi Arabia could eventually be included in MSCI EM, and may account for 4% of the index by 2017 at the earliest (depending on the rules), according to MSCI Index Research.  Foreign investors are already invested in the Saudi market, so the MSCI decision would likely be the catalyst for more foreign inflows.

4) The Argentine political outlook has gotten more interesting.  Buenos Aires Province Governor Scioli is opening up a lead in the polls over Buenos Aires City Mayor Macri.  Scioli is the head of President Fernandez’ Peronist party, and a win for him would suggest continuation of the current economic policies.  It would also impact how the ongoing default saga will likely play out, with Scioli seen as less likely to work for a negotiated solution.  There are also press reports of international companies waiting to decide on investing in Argentina until after the elections.

5) Vietnam devalued the dong for a second time in 2015.  It was a 1% move in the reference rate, so the news was hardly earth-shattering.  The dong was adjusted “to proactively implement social-economic development targets,” the central bank said.  It was last devalued (also by 1%) back in January.  Central bank Governor Nguyen Van Binh said in December that it wouldn’t weaken the dong more than 2% in 2015.