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Emerging Markets: What has Changed

(from my colleague Dr. Win Thin)

1) The Hungarian central bank cut rates by a larger than expected 20 bp to 2.10% but then signaled that the easing cycle had ended

2) The Ukraine crisis has entered a dangerous new phase after the downing last week of the Malaysian Airlines passenger plane

3) Saudi Arabia announced plans to allow foreign investment in its stock market in 2015

4) JP Morgan will increase Colombia’s weight in its EM bond indices

Over the last week, China (+3.7%), Brazil (+3.6%), and India (+2.8%) have outperformed in the EM equity space in local currency terms, while Argentina (-2.4%), Russia (-2.4%), and Chile (-0.6%) have underperformed. To put this in better context, MSCI EM was +1.6% over the past week.

In the EM local currency bond space, Sri Lanka (10-year yield -58 bp), Brazil (-24 bp), and Hungary (-16 bp) have outperformed over the last week, while Russia (10-year yield +13 bp), China (+8 bp), and the Philippines (+7 bp) have underperformed. To put this in better context, the 10-year UST yield was +7 bp over the past week.

In the EM FX space, TRY (+2.4% vs. USD), ZAR (+2.4%), COP, and BRL (both +1.8%) have outperformed over the last week, while ARS (-0.2% vs. USD), CZK (-0.2% vs. EUR), and EGP (flat vs. USD) have underperformed.

1) The Hungarian central bank cut rates by a larger than expected 20 bp to 2.10% but then signaled that the easing cycle had ended. We would have preferred a 30 bp cut to 2.0% just to keep things nice and tidy. Over this easing cycle, we saw 24 straight months of rate cuts, which must be some sort of record streak. CPI inflation is likely to pick up in H2, due to low base effects in 2013 even as the economy is recovering nicely, so the end of easing cycle makes sense to us.

2) The Ukraine crisis has entered a dangerous new phase after the downing last week of the Malaysian Airlines passenger plane. Tensions may subside a bit after Ukraine rebels began releasing the bodies of the victims as well as the plane’s “black box.” Still, EU leaders are discussing further sanctions against Russia. Perhaps the international reaction to the tragedy may finally get Putin to help put an end to the separatist rebellion in eastern Ukraine.

3) Saudi Arabia announced plans to allow foreign investment in its stock market in 2015. MSCI said that potential inclusion of the Saudi market in its indices would depend on the details of the plan. Saudi regulators will publish rules next month that will set the terms for participation by qualified foreign financial institutions.

4) JP Morgan will increase Colombia’s weight in its EM bond indices. The weight in GBI-EM Global Diversified index has been climbing and is projected to rise to 8.8% by September 30. The increase started on May 30. Between higher interest rates and bigger index weights, it looks like inflows into Colombia will continue.


Emerging Markets: What has Changed Emerging Markets:  What has Changed Reviewed by Marc Chandler on July 24, 2014 Rating: 5
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