Emerging Markets: What has Changed

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


1) Brazil’s Senate finally approved the much discussed fiscal measure 
2) Poland’s ruling party lost control of the presidency 
3) The conflict in the South China Sea is heating up again 
4) The key JPY/KRW cross has fallen to its lowest level since early 2008 
5) Russia and Venezuela signed a $14 bln investment deal 


Over the last week, Taiwan (+0.4%), South Africa (flat), and Turkey (flat) have outperformed in the EM equity space as measured by MSCI, while Russia (-5.8%), Brazil (-5.7%), and UAE (-5.5%) have underperformed.  To put this in better context, MSCI EM fell -3.0% over the past week while MSCI DM fell -0.8%.


In the EM local currency bond space, India (10-year yield -21 bp), Korea (-17 bp), and Hungary (-11 bp) have outperformed over the last week, while Russia (10-year yield +21 bp), Poland (+13 bp), and South Africa (+12 bp) have underperformed.  To put this in better context, the 10-year UST yield fell -10 bp over the past week.

In the EM FX space, ILS (+0.5% vs. USD), CZK (+0.3% vs. EUR), and EGP (flat vs. USD) have outperformed over the last week, while RUB (-4.8% vs. USD), BRL (-2.7% vs. USD), and MYR (-2.3% vs. USD) have underperformed.

1) Brazil’s Senate finally approved the much discussed fiscal measure.  The (in)famous Provisional Measures 665 and 665, which among other things,  reduces some workers’ benefits and unemployment insurance, much to the dismay of some traditional forces supporting the ruling Workers Party (PT).  This is a positive development, but one that was expected.  Finance Minister Levy looks to get the basics of the fiscal adjustment done, but there is little upside surprise.

2) Poland’s ruling party lost control of the presidency.  Andrzej Duda brought the first electoral victory for the opposition Law and Justice Party in a decade.  Few had predicted this result just a month ago, and it serves as a testament of how the Eurosceptic political undercurrent is strengthening across Europe.  What is perhaps telling is that the opposition’s victory comes against the backdrop of a relatively solid recovery for Poland.  This bodes ill for the general elections in October.

3) The conflict in the South China Sea is heating up again, the latest trigger being a confrontation between a US spy plane and the Chinese navy.  The event was recorded by CNN aboard the aircraft when the Chinese navy ordered the plan to return.  The plane was flying over China’s recently build man-made islands, which the US and many other Asian countries consider to be international waters.  The build-up of what seems to be military bases in these waters, along with the continued surveillance of the US and other countries, seems to be an accident waiting to happen.  Recall that Brunei, Malaysia, the Philippines, Taiwan, and Vietnam all claim rights to the South China Sea.  

4) The key JPY/KRW cross has fallen to its lowest level since early 2008.  This latest leg lower for the yen has negative impulses on several EM countries, but most of all on Korea.  We think relative won strength will likely get the BOK to cut rates again.  Interestingly, the IMF recently opined that the weak yen was hurting the profitability of Korean exporters.  This suggests that Korean companies have been slicing profit margins in an effort to maintain market share in the face of the weaker yen.  The IMF added that Korean exporters’ are typically slow to change prices in the short run, but do so over time as exchange rate moves become locked in. 



5) Russia and Venezuela signed a $14 bln investment deal.  Russia’s state-owned oil company Rosneft is the center piece. PDVSA is targeting a doubling of production to 6 mln barrels a day by 2019, with most of that coming from the Orinoco Belt.  Most industry observers are highly sceptical of both the amount invested and the targeted output.  Meanwhile, street protests are schedule for this Saturday, organized by the opposition leader Leopoldo Lopez, who has been jailed just over a year ago.  It’s unclear to us how meaningful this protest will be, especially since recent comments suggest that the opposition has been divided about it.  The black market bolivar rate has plunged over 20% this month, pointing to increasing stresses in the economy.




disclaimer
Emerging Markets: What has Changed Emerging Markets:  What has Changed Reviewed by Marc Chandler on May 29, 2015 Rating: 5
Powered by Blogger.