What Has Changed in EM

  • PBOC announced it would supply low-cost liquidity to banks willing to lend to smaller companies
  • China also pledged “significant” tax cuts and signaled easier monetary policy in 2019
  • The US Treasury will lift sanctions on Russian aluminum company Rusal
  • South Africa released a draft Expropriation Bill
  • Banco de Mexico hiked rates 25 bp to 8.25%

In the EM equity space as measured by MSCI, Mexico (+3.1%), Egypt (+2.5%), and Turkey (+1.7%) have outperformed this week, while Colombia (-7.2%), China (-3.9%), and Russia (-3.8%) have underperformed. To put this in better context, MSCI EM fell -1.3% this week while MSCI DM fell -4.2%.

In the EM local currency bond space, Turkey (10-year yield -113 bp), Mexico (-23 bp), and Brazil (-22 bp) have outperformed this week, while Pakistan (10-year yield +29 bp), Malaysia (flat), and Korea (-2 bp) have underperformed. To put this in better context, the 10-year UST yield fell 11 bp to 2.80%.

In the EM FX space, INR (+2.5% vs. USD), MXN (+1.8% vs. USD), and TRY (+1.1% vs. USD) have outperformed this week, while COP (-2.9% vs. USD), RUB (-2.7% vs. USD), and CLP (-1.0% vs. USD) have underperformed. To put this in better context, MSCI EM FX rose 0.4% this week.

People’s Bank of China announced it would supply low-cost liquidity to banks willing to lend to smaller companies. The central bank seeks to create a targeted version of its Medium-Term Lending Facility and will accept applications from banks that meet regulatory requirements and can increase credit to smaller companies. The funds will be up to three years in maturity at a rate of 3.15%, which is lower than other existing facilities that have shorter maturities.

China also pledged “significant” tax cuts and signaled easier monetary policy in 2019. This should be no surprise, as policymakers are struggling to boost growth. It said fiscal policy will be “proactive” and should be stronger and more efficient. This also suggests to us that China is preparing for the long haul with regards to US-China trade talks, especially after President Xi struck a very defiant tone earlier this week.

The US Treasury will lift sanctions on Russian aluminum company Rusal. This comes after oligarch Oleg Deripaska agreed to significantly reduce his ownership stake. Deripaska himself will remain under US sanctions and his property will remain blocked, but the US Treasury will remove financial restrictions on Rusal, En+ Group, and EuroSibEnergo. It will take effect in 30 days unless Congress blocks it.

South Africa released a draft Expropriation Bill that outlines the circumstances under which the government can seize land without compensation. The public has 60 days to submit written comments on the bill to the Department of Public Works. This issue is a very sensitive one, and the government should take a slow, measured approach.

Banco de Mexico hiked rates 25 bp to 8.25%. It remains in hawkish more, noting that the balance of risks to inflation are biased to the upside. The bank also noted that the exchange rate is reflecting uncertainty regarding the policies of the new government. It has been pretty critical of AMLO and clearly feels that he’s added to MXN volatility and weakness. Inflation is accelerating in December and so further hikes are likely in Q1 2019.