What Has Changed in EM

Blog icons-EMchanged

  • Political tensions on the Korean peninsula are rising
  • The IMF cut its growth forecasts for South Africa
  • Brazil announced its 2017 budget target

In the EM equity space as measured by MSCI, Hungary (+3.0%), UAE (+2.0%), and Qatar (+0.7%) have outperformed this week, while Mexico (-3.4%), South Africa (-2.1%), and Colombia (-1.7%) have underperformed. To put this in better context, MSCI EM fell -1.2% this week while MSCI DM fell -0.3%.

In the EM local currency bond space, the Philippines (10-year yield -22 bp), Singapore (-12 bp), and Brazil (-11 bp) have outperformed this week, while Russia (10-year yield +17), Turkey (+12 bp), and Colombia (+8 bp) have underperformed. To put this in better context, the 10-year UST yield fell -5 bp this week to 1.40%.

In the EM FX space, ARs (+2.3% vs. USD), HUF (+1.0% vs. EUR), and CZK (+0.3 vs. EUR) have outperformed this week, while BRL (-1.8% vs. USD), MXN (-1.7% vs. USD), and KRW (-1.4% vs. USD) have underperformed.

Political tensions on the Korean peninsula are rising. North Korea turned more belligerent on two developments. 1) the US and South Korea agreed to deploy an advanced US missile defense system in response to the growing threats from the North and 2) the US Treasury imposed financial sanctions on North Korean leader Kim Jong-Un for the first time.

The IMF cut its growth forecasts for South Africa. The agency now sees 2016 growth of 0.1% vs. 0.6% previously. This positions the IMF as more bearish than the market, with Bloomberg consensus for 2016 growth at 0.5% currently. This wasn’t a huge surprise, but it does underscore the risks facing South Africa. Rating agencies have highlighted the poor growth outlook as potential triggers for a downgrade. Our base case remains a downgrade to sub-investment grade by at least one agency before year-end.

Brazil announced its 2017 budget target. The primary deficit target of -BRL139 bln is not as bad as press reports suggested (-BRL150 bln), but neither is it that awe-inspiring. We think this is largely neutral for markets and BRL.