Emerging Markets: What has Changed

(from my colleague Dr. Win Thin)

• Reserve Bank of India Deputy Governor Patel has been named to succeed outgoing Governor Rajan.
• Political risk is back in South Africa.
• The Colombian government and the FARC rebels have reached a final peace agreement.
• S&P cut the outlook on Mexico’s BBB+ rating from stable to negative.

In the EM equity space as measured by MSCI, Colombia (+1.2%), Taiwan (+1.2%), and Thailand (+0.8%) have outperformed this week, while Turkey (-1.9%), Qatar (-1.8%), and Peru (-1.6%) have underperformed.  To put this in better context, MSCI EM fell -0.7% this week while MSCI DM rose 0.2%. 

In the EM local currency bond space, Ukraine (10-year yield -13 bp), Turkey (-12 bp), and Colombia (-7 bp) have outperformed this week, while South Africa (10-year yield +49), Indonesia (+22 bp), and the Philippines (+14 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 3 bp this week to 1.55%.

In the EM FX space, HUF (+0.7% vs. EUR), ILS (+0.4% vs. USD), and KRW (+0.3% vs. USD) have outperformed this week, while ZAR (-4.0% vs. USD), RUB (-0.7% vs. USD), and PEN (-0.5% vs. USD) have underperformed.

Reserve Bank of India Deputy Governor Patel has been named to succeed outgoing Governor Rajan.  Rajan’s term ends September 4, and so Patel will be in place for the next policy meeting October 4.  Patel was instrumental in having the RBI adopt its inflation targeting regime, and is well-regarded by the markets.  As such, we would be very surprised if Patel shifted to a more dovish stance while inflation is still above target.

Political risk is back in South Africa.  Finance Minister Gordhan and four former tax officials were asked to appear before the special police unit called the Hawks, but Gordhan refused.  The story is obviously still developing but we think the basic takeaway is that Gordhan remains under fire and does not really have Zuma's support.  Gordhan was not mentioned in press reports of an impending cabinet shuffle, but a recent poll by a major local bank showed that about half the respondents expect him to be eventually removed.  

The Colombian government and the FARC rebels have reached a final peace agreement.  This is a very positive development, ending a 52-year insurgency.  The deal must still be passed by a popular referendum to be held October 2, but polls suggest easy passage.  After a 6-month disarmament period, FARC will become a legal political party, participating in elections and starting off with guaranteed seats in Congress.

S&P cut the outlook on Mexico’s BBB+ rating from stable to negative.  We very surprised by this. Our own sovereign ratings model has Mexico at BBB+/Baa1/BBB+ and we so think it's correctly rated.  We did agree with Moody's recent move to a negative outlook, as its A3 (equal to A-) was too high.  Once again, S&P is the most aggressively negative on EM.    

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