Posts Tagged: emerging markets


Current rating is BBB-

  • Sees 2% contraction in Brazilian GDP this year
  • ‘Number of investigations of corruption among certain circumstances despite significant policy correction during Dilma Rousseff’s second term
  • Expect govt deficit to rise to 7.5% of GDP from 6.1% in 2014
  • FDI not expected to cover 4% current account deficit in 2015-17
  • Outlook is negative because execution risks to policy changes have risen

The sluggish trend in emerging markets continues.

USD/BRL at the highest in more than a decade, up 2% today.


Analysts are calling a turn in the emerging market monetary policy cycle, with more central banks likely to raise interest rates in the coming months than cut them.

The move could exacerbate an economic slowdown that has led to a rise in unemployment in many emerging markets. It comes as the vast majority of developed markets, with the exception of the US and UK, are still in easing mode.

So far this year, more emerging markets have cut rates every month than raised them. This has largely been the pattern since the start of 2012, as sluggish global growth has encouraged central bankers to loosen policy and muted inflation has given them the headroom to do so.

However, that pattern has reversed so far this month, with three EM nations, Kenya, Uganda and South Africa, tightening policy and only one, Hungary, easing (see chart).

Some analysts believe this is the start of a trend, rather than a statistical blip, amid an expectation that inflation has troughed and started to rise.

“Interest rates are at or very near cycle lows now in many parts of the emerging market world and economic conditions seem to be stabilising in many places,” said Mark Williams, chief Asia economist at Capital Economics, who sees looming rate rises in Brazil, Mexico, Turkey and Nigeria. >> Read More


In a note by BofA’s Michael Hartnett titled “When Supercycles end”, the bank looks at the latest EPFR fund flows and concludes that the wave of commodity “capitulation” revulsion selling has finally arrived.

Specifically, looking at fund flows, the most recent week saw the biggest outflow from precious metals in four months and emerging market fund outflows reaching $10 billion over the last two weeks leading Hartnett to conclude that “capitulation is beginning in EM/resources/ commodities.”

This is what the most recent flows looked like:

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The past four years or so have been extremely frustrating for investors like me who have structured their portfolios around the belief that the current experiments in central bank stimulus, the anti-business drift in Washington, and America’s  mediocre economy and unresolved debt issues would push down the value of the dollar, push up commodity prices, and favor assets in economies with relatively low debt levels and higher GDP growth. But since the beginning of 2011, the Dow Jones Industrial Average has rallied 67% while the rest of the world has been largely stuck in the mud. This dominance is reminiscent of the four years from the end of 1996 to the end of 2000, when the Dow rallied 54% while overseas markets languished. Although past performance is no guarantee of future results, a casual look back at how the U.S. out-performance trend played out the last time it had occurred should give investors much to think about.
The late 1990s was the original “Goldilocks” era of U.S. economic history, one in which all the inputs seemed to offer investors the best of all possible worlds. The Clinton Administration and the first Republican-controlled Congress in a generation had implemented policies that lowered taxes, eased business conditions, and encouraged business investment. But, more importantly, the Federal Reserve was led by Alan Greenspan, whose efforts to orchestrate smooth sailing on Wall Street led many to dub Mr. Greenspan “The Maestro.”
Towards the end of the 1990′s, Greenspan worked hard to insulate the markets from some of the more negative developments in global finance. These included the Asian Debt Crisis of 1997 and the Russian debt default of 1998. But the most telling policy move of the Greenspan Fed in the late 1990′s was its response to the rapid demise of hedge fund Long term Capital Management (LTCM), whose strategy of heavily leveraged arbitrage backfired spectacularly in 1998. Greenspan engineered a $3.6 billion bailout and forced sale of LTCM to a consortium of Wall Street firms. The intervention was an enormous relief to LTCM shareholders but, more importantly, it provided a precedent that the Fed had Wall Street’s back.
Not surprisingly, the 1990s became one of the longest sustained bull markets on record. But in the latter part of the decade the markets really started to climb in an unprecedented trajectory.  As the bubble began inflating in earnest Greenspan was reluctant to follow the dictum that the Fed’s job was to remove the punch bowl before the party got out of hand. Instead he argued that the Fed shouldn’t prevent bubbles from forming, but simply to clean up the mess after they burst.
But while U.S. markets were taking off, the rest of the world was languishing, or worse:

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Hong Kong-01 July 2015: Emerging Asia will continue to experience relatively high rates of growth over the medium term as economic prospects remain starkly divergent across emerging markets, according to Fitch Ratings’ latest Global Economic Outlook report. Growth should improve steadily through to 2017 for emerging Asia excluding China on aggregate. This should occur even as China continues to experience a gradual structural slowdown.

Differing exposures to key global macro trends – including the fall in commodity prices and likely rise in US interest rates, as well as country-specific factors – will continue to contribute to substantial differentiation in growth rates in emerging markets over the next few years. Fitch forecasts aggregate growth in emerging Asia excluding China to accelerate to 6.7% in 2016 from 6.4% in 2015, although robust Indian growth masks a weaker performance relative to the recent trends in other large regional economies such as Indonesia and Malaysia. Fitch forecasts China’s growth to slow to 6.8% in 2015 and 6.5% in 2016 as rebalancing continues. 

The region’s performance is projected to be markedly stronger than in other big emerging markets. Russia and Brazil are forecast to record substantial contractions in GDP in 2015 (-3.5% and -1.5%, respectively), followed by a weak recovery in 2016 and 2017. 

India will be key in lifting the aggregate regional growth rate, accounting for almost half of the forecast growth for the region excluding China. Notably, Fitch expects that India’s GDP growth rate this year will surpass China’s for the first time since 1999, forecasting an acceleration to 8.1% in 2016 (FY17) before settling back to 8.0% in 2017 (FY18). The implementation of structural reforms and resulting pick-up in investment remain key themes for India’s growth outlook, and recent data confirm the strengthening demand.

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Never mind the Brics or the Fragile Five — the Picts is the new emerging market group investors should worry about as they look ahead to US interest rate rises.

Analysts are divided on whether the Greek crisis will have much lasting impact on EM assets, though few doubt it has racked up the tension. What they do agree on is that the overriding focus for markets in the second half of the year will be the US Federal Reserve.

Predicting what the Fed will do and how investors will react has thrown up its own sub-genre in the business of EM research.

JPMorgan set the standard during the “taper tantrum” of 2013 by identifying the Fragile Five, also known as the Biits — Brazil, India, Indonesia, Turkey and South Africa — that were most exposed to the beginning of the end of the Fed’s $85bn a month asset buying programme, or quantitative easing. They were marked out by having large or poorly financed current account deficits, high rates of inflation and other imbalances.

Richard Iley, chief EM economist at BNP Paribas, added to the genre last week by telling investors to beware the Picts — Peru, Indonesia, Colombia, Turkey and South Africa — which he says are now the most vulnerable as the Fed, having done with QE, prepares to raise interest rates for the first time since 2006. He ranked 16 big emerging markets from 1 to 16 on 20 macroeconomic variables and totted up the scores. The Picts came out the worst.

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The problem with emerging markets

14 June 2015 - 9:44 am

It was not too long ago that the emerging markets were regularly eulogised as the permanent powerhouses of the world economy. During the 2000s, with excitable neologisms like Brics (Brazil, Russia, India, China, South Africa) coined in their honour, the big emerging economies drove a boom in global output and trade.

And when the rich world suffered a dislocating shock during the financial crisis in 2008, many middle-income nations, with relatively resilient banking systems and large foreign exchange reserves, rode out the turbulence and rapidly resumed growing.

That euphoria, which has been subsiding for years, is now at a low ebb. This week the World Bank warned of a “structural slowdown” as developing nations ceded the leading role on global growth to the rich world. A decline in import demand means emerging markets subtracted from world trade growth in the first quarter of this year for the first time since 2009.

In reality, weaknesses within the emerging world have been evident for some time. Few countries have built the kind of diverse high-productivity economy that will propel them into the first rank of rich states.

According to a study by the International Monetary Fund, the slowdown in trend growth in middle-income countries has been in train since the crisis. For years, weak productivity improvements were masked by low interest rates, helped by quantitative easing in the US, and by high commodity prices.

Those props are now being kicked away and, with the US Federal Reserve yet to raise rates, there may still be a bigger squeeze to come. The growth model of countries like Brazil has been exposed. Chronic deficits, high inflation and an overvalued exchange rate have left the country with no alternative but tighter monetary policy and a recession. The evaporation of a favourable external environment exposes the past failure to reform. One or two leaders, such as Narendra Modi in India and Joko Widodo in Indonesia, are belatedly trying to reorient government spending away from wasteful subsidies and towards productive investment, but it will take time.

The process of poor countries getting rich, much of which used to be driven by export-led manufacturing, has become more complex. Emerging economies are routinely turning away from manufacturing at much lower levels of income than earlier waves of industrialisers. An apparent structural fall in trade growth relative to overall expansion, probably as a result of nations like China taking more of their supply chains in-country, means less chance for other developing countries to export their way to prosperity. >> Read More


The Chinese A-share market is now the world’s most heavily traded. But it is disconnected from trading in the rest of the planet. It is like a whale, thrashing in a small tub of water.

Everyone now acknowledges that this cannot continue much longer. And so this week was dominated by arguments over how, and how quickly, the Chinese whale can be introduced into the sea of global markets. But that requires big changes in the behaviour both of China’s authorities and of investors.

Both sides are, correctly, nervous that the Chinese whale could displace a lot of water. And in return for opening a big new conduit for foreign capital, Chinese authorities will have to relax their control over their domestic market.

The issue of A-shares, the category of shares that with a few exceptions is still restricted to domestic Chinese investors, also shines a light on the dominant role that indexers now play. No longer passive, they are unavoidably active players, driving many trillions of dollars.

This week MSCI, the biggest indexer of international markets, announced its annual review of the members of its emerging markets index, used as a benchmark by funds with $1.7tn in assets. Not only index funds but any nominally active fund that uses the MSCI EM as a benchmark is, in practice, obliged to shift its holdings in response to the review. China, through shares quoted in Hong Kong, makes up 25 per cent of the MSCI EM. That would rise to more than 45 per cent if A-shares were included.

MSCI consulted on admitting A-shares to this index, at a weighting of only 5 per cent of their total market value, and came under passionate lobbying from all sides. >> Read More


Developing countries are facing a “structural slowdown” likely to last for years and are ceding their role as the world’s growth engine to more mature economies such as the US, according to the World Bank.

The Washington-based bank on Wednesday lowered its forecast for global growth this year to 2.8 per cent, partly because the much-anticipated benefits of lower oil prices have been limited.

Seven years after the global financial crisis, high-income countries were resuming their role as drivers of international growth, the World Bank said in its twice-yearly report.

By contrast, with the exception of India and a few others, the bank warned that developing economies such as China must confront an era of slower growth.

The bank’s intervention comes amid mounting evidence that the steady boost the world economy has derived for years from the rise of countries such as Brazil and China is becoming a drag. >> Read More


MSCI has not decided to include China stocks in its index yet – as opposed to what mainstream media believes. MSCI instead says the inclusion is “on track” for inclusion but thereremains three significant hurdles including liquiidty restrictions.

Full MSCI Statement on China inclusion:

MSCI, the premier provider of global equity indexes, announced today that it expects to include China A?shares in its global benchmarks after a few important remaining issues related to market accessibility have been resolved. MSCI and the China Securities Regulatory Commission (CSRC) will form a working group to contribute to the successful resolution of these issues.

“Substantial progress has been made toward the opening of the Chinese equity market to institutional investors,” said Remy Briand, MSCI Managing Director and Global Head of Research. “In our 2015 consultation, we learned that major investors around the world are eager for further liberalization of the China A?shares market, especially with regard to the quota allocation process, capital mobility restrictions and beneficial ownership of investments.”

Briand continued, “Because MSCI’s client base is so large and diverse, we have a strong interest in ensuring that remaining issues are addressed in an orderly and transparent way.  We are honored that the CSRC has recognized MSCI’s expertise regarding the requirements of international institutional investors. We look forward to a fruitful collaboration that will contribute to the further opening of the China A?shares markets to international investors and the inclusion in the MSCI Emerging Markets Index.”

MSCI stated that it may announce the decision to include China A?shares in the MSCI Emerging Markets Index as soon as the issues it has outlined are resolved. This may happen outside the regular schedule of its annual Market Classification Review. >> Read More

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Technically Yours,
Team ASR,
Baroda, India.