What Has Changed in EM

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1) The ruling party in India, the BJP, was defeated in the Bihar state assembly elections
2) Brazilian markets have gotten excited about the prospects of a change of the country’s Finance Minister
3) The MSCI went through with its decision to include several Chinese ADRs into its index
4) China doubled the margin requirement for stock purchases after markets closed Friday
5) Mexico’s central bank sounded somewhat less hawkish in its minutes

In the EM equity space, Turkey (+0.2%), Hungary (+0.1%), and Brazil (-0.2%) have outperformed over the last week, while UAE (-5.3%), Taiwan (-4.2%), and Colombia (-3.8%) have underperformed.  To put this in better context, MSCI EM fell -3.6% over the past week while MSCI DM fell -2.5%.

In the EM local currency bond space, Poland (10-year yield -23 bp), Brazil (-22 bp), and India (-4 bp) have outperformed over the last week, while the Philippines (10-year yield +37 bp), Colombia (+25 bp), and Malaysia (+20 bp) have underperformed.  To put this in better context, the 10-year UST yield fell -4 bp over the past week.

In the EM FX space, EGP (+2.6% vs. USD), TRY (+2.0% vs. USD), and ILS (+0.9% vs. USD) have outperformed over the last week, while COP (-5.9% vs. USD), RUB (-3.4% vs. USD), and KRW (-1.9% vs. USD) have underperformed.

1) The ruling party in India, the BJP, was defeated in the Bihar state assembly elections.  The party came out with 59 seats out of 243, down 35 seats from the previous elections, considerably worse than expected.  Many were looking at the Bihar elections as a referendum of sorts on Modi’s first 17 months in power.  Regional elections matters because the composition of the state assemblies will determine party representation in the Rajya Sabha, the Upper House.  And it’s there that the government is being blocked by the opposition.  Now the focus turns back to the challenges of implementation – the age old problem in India.

2) Brazilian markets have gotten excited about the prospects of a change of the country’s Finance Minister. Several news articles suggest that former Central Bank President Meirelles is being pushed by former President Lula to take the job.  The news was well received since many already assume that current Finance Minister Levy will leave in the near future, and Meirelles is seen as the best of the visible alternatives.

3) The MSCI went through with its decision to include several Chinese ADRs into its index. These include Alibaba and Baidu.  We play down this development and tend to see it as further elaboration on what MSCI had already indicated.  More Chinese ADRs will be included in the spring as well.  We note that the MSCI re-jig also will include more Israeli and Indian exposure.

4) China doubled the margin requirement for stock purchases after markets closed Friday.  Margin requirements will be raised to 100% from 50% starting November 23.  This means that an investor with CNY1 mln in their account is limited to borrowing another CNY1 mln from a broker to buy more shares, instead of CNY2 mln previously.  The move is clearly meant to limit speculative froth in the Chinese markets, with officials noting it would help prevent systemic risks in the financial system.

5) Mexico’s central bank sounded somewhat less hawkish in its minutes.  One board member said the bank may need to hike rates before the Fed if volatility increases, another one said such a move wasn’t be advisable, and a third one said the central bank should wait for the Fed to hike and assess the impact on Mexico before moving.  We think that the bank will err on cautiousness and choose to wait for the Fed.  But even the discussion about hiking rates just after the Fed seems premature to us.  Inflation around 2.5% is at all-time lows, and there appears to be no pass-through from the weak peso.  Chile, Colombia, and Peru (as well as Brazil) have all hiked rates this year but with little lasting support for their currencies.  We can’t rule out a Mexico rate hike after the Fed lift-off, but we don’t think it’s advisable.