Emerging Markets: What has Changed

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

1.    President Rousseff is seeing declining support
2.  There were enough changes in the COPOM statement last night to suggest they are on hold for the time being
3.   China announced a mini stimulus package to support growth
4.    The Turkish mayoral elections were a vote of confidence for Erdogan’s AKP
5.    The political conflict in Thailand is heating up again

Over the last week, Turkey (+7.3%), Hungary (+6.9%), and Pakistan (+4.3) have outperformed in the EM equity space in local currency terms, while Egypt (-6.7%), China (+0.4%), and Malaysia (+0.5%) have underperformed. 

In the EM local currency bond space, Indonesia (10-year yield -25 bp), Ukraine (-23 bp), and Turkey (-19 bp) have outperformed over the last week, while India (10-year yield +18 bp), South Africa (+17 bp), and Brazil (+14 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 11 bp over the week.

In the EM FX space, TRY (+2.3% vs. USD), HUF (+1.3% vs. EUR), and KRW (+1.3% vs. USD) have outperformed over the last week, while BRL (-1.1%), CLP (-0.7%), and ZAR (-0.6%) have underperformed.

1. President Rousseff is seeing declining support.  Ibope poll showed the government’s approval rating fall from 43% to 36%.  This survey was taken from March 14-17.  A slightly different take showed approval of Rousseff’s way of governing fall from 56% to 51%, and compares to the 45% low in July as protests took place.  Yet the opposition has largely been unable to tap into this popular disapproval.  There is a risk that as Rousseff’s popularity wanes, she will be more tempted to rely on fiscal stimulus.  The consolidated budget balances have stabilized in recent months, but at far weaker levels than in the past.  Fiscal slippage was a major factor behind S&P’s recent one notch downgrade to BBB-, but the stable outlook lines up with our view that further downgrades below investment grade are unwarranted now.

2. There were enough changes in the COPOM statement last night to suggest they are on hold for the time being.  “The committee will monitor the evolution of the macroeconomic outlook until its next meeting, to then define the next steps in its monetary policy strategy.”  It also left out the phrase about "continuation" of the tightening cycle so it's going to be data dependent for the May 28 decision.  A lot can happen between now and then, but the wholesale IGP-M and PPI inflation measures point to further pass-through to the consumer level.  As such, we cannot rule out further tightening ahead.

3. China announced a mini stimulus package to support growth.  The package will include the sale of RMB150 bln in bonds to support the railway industry and the creation of a RMB200-300 bln development fund.  The package also includes tax breaks to small companies and increased funding for socialized housing.  The new measures could be seen as further evidence that the government is bracing for a further slowdown, especially as more bad loans begin to surface later in the year.  The government seems to be trying to somewhat rebalance growth away from the bank-lending driven sectors which are likely to see tightening ahead.  In our view, this is one reason behind the decision to stop CNY appreciation: support exporters, or at least stop hurting them.

4. The Turkish mayoral elections were a vote of confidence for Erdogan’s AKP.  The AKP got 46% of votes, compared with 26% for the main opposition party, the CHP.  This was the first election since last summer’s Gezi Park protests and December’s corruption scandals.  Now it’s all about the presidential elections in August, and it looks pretty good for the Erdogan.  Also note that AKP’s share of votes was 38% in the last local elections in 2009.  In the 2011 national elections, the AKP share was just shy of 50%.

5. The political conflict in Thailand is heating up again.  A vehicle carrying anti-government protestors was shot at in Bangkok, killing one person and injuring four.  Since the latest bout of turbulence between red and yellow shirts resurfaced in November, there have been 21 dead and 733 reported cases of injury.  Obviously this development will only serve to further polarize the situation.  Still, asset prices have largely ignored political developments, with Thai equities amongst the best global performers this year, up over 7%, and the THB gaining 1% against the USD.  Still, we think the situation is potentially explosive, lending itself to many negative tail risks.  We prefer to wait on the side lines for now.