Emerging Markets: What has Changed

(from my colleague Dr. Win Thin)

• China unveiled a second equity link that will allow foreign investors to buy local stocks with fewer restrictions.
• Saudi Arabia will allow qualified foreign investors to subscribe to local IPOs starting this January.
• South Africa’s two main opposition parties agreed to informally band together in local governments.
• The Brazilian central bank decreased the daily intervention amount to 10,000 reverse swap contracts from 15,000 before, just a week after it increased that amount from 10,000. 

In the EM equity space as measured by MSCI, Qatar (+4.0%), Colombia (+3.0%), and China (+1.5%) have outperformed this week, while Czech Republic (-3.9%), Poland (-3.3%), and Chile (-2.6%) have underperformed.  To put this in better context, MSCI EM fell -0.1% this week while MSCI DM fell -0.5%.

In the EM local currency bond space, Colombia (10-year yield -19 bp), Russia (-8 bp), and Taiwan (-4 bp) have outperformed this week, while Ukraine (10-year yield +27), Turkey (+22 bp), and the Philippines (+9 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 5 bp this week to 1.56%.

In the EM FX space, COP (+1.8% vs. USD), RUB (+1.4% vs. USD), and ILS (+1.1% vs. USD) have outperformed this week, while ARS (-1.9% vs. USD), CLP (-1.8% vs. USD), and KRW (-1.3% vs. USD) have underperformed.

China unveiled a second equity link that will allow foreign investors to buy local stocks with fewer restrictions.  The China Securities Regulatory Commission said it won’t impose an aggregate investment quota when trading starts under the new Shenzhen-Hong Kong link.  Also, regulators said that the quota will be removed for the existing Shanghai-Hong Kong link.  The Shenzhen-Hong Kong link should start in about four months, according to Hong Kong exchange officials.  

Saudi Arabia will allow qualified foreign investors to subscribe to local IPOs starting this January.  The Capital Market Authority added that investors “may apply these instructions on any offering before that date” with approval from the issuer.  This comes less than a month before restrictions are eased on who qualifies as a foreign investor.  Saudi Arabia started allowing limited foreign investment last June, so opening up access to IPOs to foreigners is just the latest measure in the process of encouraging more investment inflows.

South Africa’s two main opposition parties agreed to informally band together in local governments.  Policy-wise, the two parties couldn't be more different.  The EFF is a populist breakaway from the ANC, while the DA favors pro-market orthodoxy.  That's why the two parties fell short of a formal alliance.  The key metric going forward is how the ANC reacts to the election losses.  We still think they will veer more populist, but some optimists feel the ANC reformist wing has gained the upper hand.  Stay tuned.

The Brazilian central bank decreased the daily intervention amount to 10,000 reverse swap contracts from 15,000 before, just a week after it increased that amount from 10,000. This sort of fine turning seems misguided, but it suggests that officials are comfortable with an exchange rate somewhere around 3.20.  President Temer said recently that Brazil needs to maintain a balanced exchange rate, neither too weak nor too strong.  We think much will depend on external factors.    

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