Emerging Markets: What has Changed

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

1) The EU sanctions on Russia will be extended for another six months.   

2) Lawmakers in Hong Kong voted down a Beijing-backed plan to change the political system.   

3) Argentine presidential candidate Scioli of the ruling alliance has picked Zannini as his Vice Presidential candidate.   

4) Malaysia‘s opposition alliance has collapsed.   

5) Brazil’s corruption investigation is heating up again. 

Over the last week, India (+3.4%), Russia (+2.4), and the Philippines (+2.0%) have outperformed in the EM equity space as measured by MSCI, while Czech Republic (-4.1%), China (-3.8%), and Chile (-1.7%) have underperformed.  To put this in better context, MSCI EM fell -0.4% over the past week while MSCI DM rose 0.6%.

In the EM local currency bond space, Indonesia (10-year yield -21 bp), Singapore (-20 bp), and India (-17 bp) have outperformed over the last week, while Ukraine (10-year yield +121 bp), Turkey (+27 bp), and Hungary (+14 bp) have underperformed.  To put this in better context, the 10-year UST yield fell -11 bp over the past week. 

In the EM FX space, RUB (+1.7% vs. USD), BRL (+1.2%), and ZAR (+1.2%) have outperformed over the last week, while PLN (-0.9% vs. EUR), COP (-0.7%), and HUF (-0.5% vs. EUR) have underperformed.

1) The EU sanctions on Russia will be extended for another six months.  Russia then said it would extend its EU food import ban for another six months in retaliation.  Central bank First Deputy Governor Tulin said that he expects sanctions on Russia to remain in place until 2018, while Finance Minister Siluanova said that extended sanctions are assumed in all of the ministry's forecasts.  Data this week were poor.  When all is said and done, we think the central bank continues easing after saying this week that the scope to do so was "limited" after it cut rates by the expected 100 bp.

2) Lawmakers in Hong Kong voted down a Beijing-backed plan to change the political system.  The proposed reform would have citizens vote to directly elect leaders, but only those vetted by a pro-Beijing electoral committee.  Some expect this decision to rekindle the tensions between Hong Kong and China that were symbolized by the massive Occupy Central (the “umbrella movement”) that took place last year.  There was not much reaction in Hong Kong’s equity market, which was down marginally and outperformed most other regional indices.  

3) Argentine presidential candidate Scioli of the ruling alliance has picked Zannini as his Vice Presidential candidate.  Zannini is a close aide to current President Fernandez, and so the thinking goes that her fingerprints would be all over the new government if Scioli were to win.  Scioli confirmed that “I consulted the president on this issue.  Picking Zannini, a founding member of this movement with a history of proximity to Nestor and Cristina, gives certainty.”  Observers hoping for a change in Argentine politics will be disappointed.  

4) Malaysia‘s opposition alliance has collapsed.  The three-party Pakatan Rakyat had struggled to bridge the differences between the disparate parties, but ultimately failed to do so.  This comes at the same time that the ruling UMNO is seeing an internal squabble between current PM Najib and former PM Mahathir.  The central bank warned that it won’t be drawn into any political agenda, and said that domestic factors behind a loss of confidence in the country must be addressed.  This is a very unusual statement, but obviously it's concerned about recent political developments (which also include questions about the handling of state-run 1MDB). 

5) Brazil’s corruption investigation is heating up again.  Federal police have arrested the president of the massive business conglomerate Odebrecht.  The company has been cited during various plea bargain statements as being deeply involved in the ongoing corruption scandal.  Meanwhile, the fundamentals continue to worsen with IPCA rising 8.8% y/y in mid-June, the highest rate since December 2003.  Our own sovereign rating model now shows Brazil moving into junk territory (BB+) after just hanging on to investment grade (BBB-) previously.

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