8th April 2014
The rebound in emerging markets has gained momentum, supported by benign global macro data and positive local news says Gustavo Medeiros, Portfolio Manager at Ashmore. He says the global economy is rebalancing with some markets showing definite signs of improvement with the Brazilian and Indonesian trade balances bouncing back into surplus.
Medeiros says that conversely, in developed markets, overly optimistic expectations are being rebalanced towards a more sober reality: growth forecasts for the US are being revised downwards following the publication of disappointing trade numbers, and the ECB finally recognised that inflation is undershooting their expectations and that they may have to do something unconventional about it. He says that investors piled into European fixed income assets, singing the old Elvis tune which calls for “a little less conversation, a little more action”.
He notes that EM equities rose by 1.4% during the week while EM fixed income indexes rose between 0.4% and 1.2% with institutional money returning with US$ 2.5bn moving into EM Equities and US$1.0bn into EM debt.
He says that foreign investor inflows into EM equities have been particularly helpful in a country like India, where FX reserves increased US$5bn to US$304bn on the last week of March as the Reserve Bank of India has been buying US dollars to re-build FX reserves. “Demand for Indian assets has been boosted by recent electoral polls showing that the nationalist-reformist, Narendra Modi, may win the elections with a strong enough mandate to implement meaningful economic reforms. The six week long election in India, the largest democratic exercise in the world, is starting this week and will run until May 12, but we believe investors will not wait until the final vote to start building positions, especially in the current, favourable market conditions”.
The note than considers Brazil, Turkey and China.
The Brazilian trade balance bounced into surplus in March, helped notably by a reduction in the oil account deficit. The number is a sign that the process of rebalancing is under way, helped by BRL weakness and tight monetary policy. The Central Bank hiked the benchmark Selic interest rate for the 9th consecutive month to 11% in line with expectations. Domestic markets reacted positively to the statement, which indicated it might be the last hike of this cycle, provided inflation did not surprise on the upside. The statement’s previous commitment to “continue[ing] the process of interest rates adjustment”, typically associated with mid-cycle decisions, was removed, and replaced with a simple promise to “monitor the evolution of macroeconomic scenario until its next meeting, in order to define the next steps of its monetary policy strategy.”
Turkey also posted a slightly better trade balance in February, with a small reduction in the trade deficit to USD 5.1bn from USD 6.8bn. However, March headline inflation jumped to 8.4% yoy nsa, vs. 8.1% expected, and the core inflation index also jumped to 9.3% yoy owing to the lagged effects of the currency devaluation.
China’s State Council announced a series of measures to support domestic demand and stabilise growth. The key initiatives include:
The announcements reveal a government committed to the process of reforming the economy without allowing for a major economic slowdown in order to prevent any major systemic risks.