David Rees (Schroders) | Financial markets in the emerging world suffered a wobble last month. It followed the belated “blue wave” in the US election which appeared to clear the way for a large fiscal stimulus, and sparked a sell-off in the Treasury market. The bout of volatility harked back to the Taper Tantrum that rocked EM markets in 2013. Fears of a repeat, as the US economy recovers this year, have become a major concern among investors.
Theo Smid (Atradius) | With the economic outlook improving, there are opportunities to be found. We identify markets that have relatively strong prospects. Promising markets are identified based on three criteria: (1) the pace of GDP recovery in the wake of the Covid-19 crisis, (2) a relatively low number of Covid-19 cases (per 100,000 inhabitants), and (3) stable political and institutional conditions. We do acknowledge that for some countries there may be an underreporting of Covid-19 cases, as testing capabilities differ per country. Therefore, we attach a higher weight to the other two factors in the selection of countries. Based on these broad criteria alongside our market experience, we have identified Chile, Egypt, Senegal, Malaysia and Vietnam as the most promising markets.
Union Bancaire Priveé (UBP) | Fixed-income frontier markets have seen significant growth in both importance and liquidity over the past decade. While still mainly thought of as part of global EM investments, frontier markets have “grown up” and deserve to be considered separately.
The rapid rise in US Treasury yields has led to concerns about the fundamental outlook for emerging markets (EM). In particular, investors fear that higher risk-free yields will translate into unsustainably high borrowing costs for EM companies. While analysts from Julius Baer acknowledge the headwind for the developing world, they also believe that perception is generally more negative than reality.
I. de la Torre and L. Torralba (Arcano Partners) | The economist Dornbusch says that “crises take long to arrive than you can possibly imagine, but when they do come, they happen faster than you can possibly imagine”. The events that have affected the emerging countries this summer have proven Dornbusch was right.
Miguel Navascués | Emerging markets continue seething and carry with them ever less confidence. The latest sign is that the flight of capital has sought refuge in US bonds (and in Wall Street, a new record), among other destinations, and has reduced the yield curve to a minimum of many years of 0.23%.
Intermoney | Other risks to which we must pay attention are those arising from emerging markets. In this case, one should not focus only on one country, as there are numerous fronts open. For example, the latest update to the IMF forecasts cut the growth forecasts for Argentina and Brazil, stressing the more difficult finanacial conditions and the need for adjustments to the Argentinian economy while, in the case of Brazil, it stressed the effect of strikes and political instability.
During the second most significant repricing in U.S. Treasury bond yields since 2013, emerging markets debt, especially local currency bonds, has so far significantly outperformed equity, oil and U.S. Treasury beta. PIMCO’s analysts believe this resilience in EM reflects the resolution of most balance-of-payments issues over the past few years.
Emerging Markets capital inflows are slowing down only modestly, offering some protection in case of large outflows. Capital inflows to EMs are expected to slow down in 2017, although Manolis Davradakis at AXA IM does not believe they would fall off a cliff as in 2013-2015.
BoAML | One of the most popular ideas in emerging markets economics is grouping Brazil, Russia, India and China together. Here we argue that grouping these very different economies together for economic forecasting was never very useful in the first place. The only thing they have in common is size. The recent divergence in the group makes it even less useful.