What Has Changed in EM

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1) The Argentinian presidential race will have a runoff
2) Poland has its first majority government since 1989
3) Reports suggest that China is considering a trial program to allow individual investors to directly buy overseas assets
4) The 13th Five Year Plan in China was quite ambitious
5) Brazil’s deficit will be much larger
6) The Hungarian central bank is getting more dovish

In the EM equity space, Qatar (+0.5%), Czech Republic (-0.5%), and Korea (-0.5%) have outperformed over the last week, while Brazil (-4.4%), Indonesia (-4.3%), and UAE (-3.4%) have underperformed.  To put this in better context, MSCI EM fell -2.5% over the past week while MSCI DM was flat.

In the EM local currency bond space, the Philippines (10-year yield -34 bp), Brazil (-8 bp), and South Africa (-5 bp) have outperformed over the last week, while Indonesia (10-year yield +21 bp), Mexico (+10 bp), and Russia (+9 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 6 bp over the past week.

In the EM FX space, ILS (+1.0% vs. USD), HUF (+0.5% vs. EUR), and CNY (+0.5% vs. USD) have outperformed over the last week, while RUB (-2.5% vs. USD), MYR (-1.5% vs. USD), and KRW (-1.4% vs. USD) have underperformed.

1) The Argentinian presidential race will have a runoff.  This came as a surprise since the latest polls suggested a high probability that the ruling party candidate, Daniel Scioli, would win in the first round by securing over 40% of votes.  But with over 90% of votes counted, Scioli received only 36.7%, compared with 34.5% for the opposition candidate Mauricio Macri.  The second round, to be held November 22, is likely to be even more unpredictable. To start, Sergio Massa, who came in at third with around 21% of votes has yet to declare support for either candidate.  While “kingmaker” maybe an exaggeration, he is likely to be very influential.  The result will also depend on how much traction the negative campaigns will get.  Scioli, for example, consistently paints a picture of disorderly currency devaluation and cuts in social benefits under a Macri government.

2) Poland has its first majority government since 1989.  The triumph of the Law and Justice party (PiS) was expected, and the results came in accordingly.  The PiS took 37.7% of the vote and is projected to win 232 out of the 460 seats in parliament.  The impact of the change in government is likely to be felt first on the geopolitical sphere, especially in Poland’s relations with the European Union.  Recall that PiS campaigned on hardening the country’s stance against refugees.  Markets were well prepared for this outcome since the surprise victory of President Duda (also from the PiS) back in May.  Still, much of populist tone to the PiS campaign is likely to be just that: campaigning, with smaller direct impact on de facto policymaking.  However, the result will increase the degree of uncertainty surrounding the country and likely dampen investor’s medium-term optimist towards Polish assets.

3) Reports suggest that China is considering a trial program to allow individual investors to directly buy overseas assets.  The regulatory change would be established for the Shanghai free trade zone.  The move towards greater capital account liberalization and comes ahead of the IMF’s decision on whether to allow the yuan to join the SDR basket – which many now see as a done deal.  The yuan appreciated sharply overnight, gaining 0.6% to CNY6.3174.

4) The 13th Five Year Plan in China is quite ambitious. Its goals included ending the one child policy, doubling GDP and residents’ income by 2020, cracking down on corruption, moving forward on SOE reform, and liberalizing the prices of goods and services.

5) Brazil’s deficit will be much larger.  But we already knew that.  The government revised the 2015 primary fiscal target from a 0.15% of GDP surplus to a -0.8% deficit.  This was driven by lower revenues given the slumping economy.  In addition, planned spending cuts are facing resistance in Congress.  The fiscal side remains the largest macroeconomic issue for Brazil at the moment, and there is no improvement in sight.  If anything, pressure on Finance Minister Levy has only intensified as the left wing of the ruling party pushes for a softer adjustment.

6) The Hungarian central bank is getting more dovish.  Central bank Vice President Nagy said it could hold rates steady into 2019.  This went beyond the formal forecast horizon of steady rates until 2017.  Deflation risks persist, but it’s hard to see how anyone can try to predict monetary policy four years out.