What Has Changed in EM

  • Reserve Bank of India delivered a dovish surprise
  • Thai Princess Ubolratana announced she is running for Prime Minister
  • EU President Donald Tusk may return to Polish politics
  • South Africa President Cyril Ramaphosa unveiled plans to boost the economy and create jobs
  • Euphoria over Brazil’s prospects has faded a bit
  • Banco de Mexico delivered a dovish hold

In the EM equity space as measured by MSCI, Egypt (+5.7%), Malaysia (+0.4%), and India (+0.2%) have outperformed this week, while Brazil (-5.7%), Hungary (-3.0%), and Qatar (-2.4%) have underperformed. To put this in better context, MSCI EM fell -1.5% this week while MSCI DM fell -1.0%.

In the EM local currency bond space, Argentina (10-year yield -30 bp), Pakistan (-15 bp), and Mexico (-12 bp) have outperformed this week, while Brazil (10-year yield +30 bp), Turkey (+21 bp), and Czech Republic (+5 bp) have underperformed. To put this in better context, the 10-year UST yield was flat at 2.63%.

In the EM FX space, MYR (+0.7% vs. USD), EGP (+0.4% vs. USD), and PHP (+0.4% vs. USD) have outperformed this week, while ZAR (-2.2% vs. USD), BRL (-1.9% vs. USD), and ARS (-1.7% vs. USD) have underperformed. To put this in better context, MSCI EM FX fell -0.4% this week.

Reserve Bank of India delivered a dovish surprise. Rather than standing pat as most expected, it instead cut rates 25 bp. Ahead of general elections in May, the RBI just delivered a nice present to Prime Minister Modi. This was the first meeting under new Governor Das and calls his independence into question since he replaced the more hawkish Urjit Patel.

Thai politics were upended by the surprise announcement that Princess Ubolratana is running for Prime Minister. The royal family is supposed to be apolitical and a royal has never run for office before. She is the sister of King Vajiralongkorn and will run as a candidate of the Thai Raksa Chart Party that is linked to former Prime Minister Thaksin. This will make it more difficult for junta leader Prayuth, who hopes to win the March 24 election.

EU President Donald Tusk may return to Polish politics. Reports suggest he will start a new movement to unite the opposition. Tusk’s Civic Platform is running a distant second in polls and so needs support from other parties if ruling Law and Justice is to be defeated. Elections in Poland are due by November, while Tusk’s term as EU president ends in December.

South Africa President Cyril Ramaphosa unveiled plans to boost the economy and create jobs. Highlights include efforts to make investing and doing business in the country easier, to attract more tourists, and to increase efforts to stop corruption. State power utility Eskom will be split in three (generation, transmission, and distribution). Lastly, he announced that elections will be held May 8.

Euphoria over Brazil’s prospects has faded a bit. Key lawmakers are warning that it will take longer than expected to hold a vote on pension reforms. At the same time, President Bolsonaro’s health is questionable as he continues to suffer from his stabbing during the campaign last year. After surgery related to the stab wound, Bolsonaro has come down with pneumonia. Lastly, the tragic Vale dam disaster has dented business confidence.

Banco de Mexico delivered a dovish hold. The bank dropped its reference to possible further rate hikes in its policy statement and pointed to increasing slack in the economy. It noted that growth decelerated more than it expected in Q4 and sees further weakness in Q1. Next policy meeting is March 28, no change is expected then.