Business as usual in Emerging Markets, Ashmore’s Dehn says
Jan Dehn, head of Research at Ashmore discusses year-end global market dynamics and why it is business as usual for Emerging Markets.
Breath-taking pace of reform in Mexico, 10% rates in Brazil, scorching growth in the Philippines, a resolution to the YPF dispute in Argentina, the government survives a no-confidence vote in Thailand, South Korea’s big BOP surplus surprise, Nigeria set to overtake South Africa as the continent’s largest economy, Ukraine plays both sides, and India starts to debate moving local bonds to Euroclear settlement. In short, business as usual in Emerging Markets (EM). Global market sentiment produced headwinds for EM fixed income, but support for EM and Frontier Market equities. Year-end market dynamics – fast money squaring positions – may already be making themselves felt. US data was mixed to marginally positive, and Germany moved towards a grand coalition government. The main global market focus this week will be US payrolls before attention switches to December’s FOMC meeting.
• Mexico: Mexico continues to reform at a breath-taking pace. Last week the government passed an important financial sector reform, which should help to raise Mexico’s very low private credit to GDP ratio
• Brazil: Brazil’s central bank raised policy interest rates to 10% last week and signalled that the pace of hikes may slow from 50bps to 25bps, provided the data supports such a moderation in the pace of tightening
• Philippines: The economy of the Philippines expanded by 4.5% in real terms in the Q3 2013. This quarterly expansion means that the economy is now 7% greater than in the same quarter last year. Domestic demand is driving growth, but unlike earlier this year private consumption and investment have now replaced government spending as the main source of expansion. Exports continue to be a drag on growth. Undoubtedly, the recent typhoon related damage will dampen Q4 growth, but reconstruction spending will then begin to add to GDP growth numbers in subsequent quarters
• Argentina: The on-going dispute between a Spanish oil company and the Argentinean government following the April 2012 nationalisation of YPF Repsol looks to be drawing to a close, when the two parties announced progress on negotiations for a settlement. This is positive development. The lack of a resolution to the dispute has prevented Argentina from attracting investment into its massive shale gas deposits, which are estimated by the US Energy Information Administration to be the third largest on the planet
• Thailand: Premier Yingluck Thaksin survived a non-confidence vote as the domestic political dispute between the government (which holds a commanding majority in parliament) and the opposition continued. We do not expect this noise and protracted conflict to abate anytime soon
• Ukraine: The Ukranian government remains non-committal in its relations with Russia and the European Union. The former offers immediate financial relief, but likely in exchange for ‘a pound of flesh’, i.e. loss of sovereignty, while the European Union offers greater independence, but in exchange for political and economic concessions, which Ukraine’s administration does not appear ready to satisfy ahead of elections scheduled for March 2015
• Nigeria: The Nigerian Bureau of Statistics announced that it will rebase its GDP figures based on 2010 data, rather than 1990. The emergence of whole new sectors in the economy, such as telecoms and significant growth in private consumption in the country will result in a significant upward revision to current USD GDP levels. As a result, Nigeria’s GDP – currently USD 270bn – may overtake that of South Africa after the revision
• India: Indian officials indicated last week that the government is looking into moving local currency bonds to Euroclear settlement. This would be a very positive development. India’s USD 700bn domestic fixed income market is difficult to access for foreign investors due to archaic settlement procedures
There are signs of the usual year-end global market dynamics are beginning to take root, meaning position squaring and reluctance on the part of short-term investors and banks to take directional views ahead of what is usually a period of declining liquidity leading up to the New Year. Global market liquidity was also low in a holiday shortened US trading week. This global backdrop produced headwinds for EM fixed income and currencies, but the environment was stronger for EM stocks. Valuations in EM equities remain at a significant discount to DMs, at roughly 40%. Earnings are already beginning to recover in EM equities as the market recognises the resilience of EMs to tapering risk, stable inflation and a strong consumer market.
Looking ahead, the focus this week will be on US payrolls, ISM, and new home sales. Further ahead, the FOMC meeting of 17-18 December will command attention as some commentators believe that the Fed could taper in December (for our views see “Fed Captain and the World of Tomorrow”, The Emerging View, November 2013). Early 2014 will see extended unemployment benefits expire for 1.3m claimants, which could reduce consumption by 0.4% of GDP unless the benefits are extended. The resulting 0.2%-0.5% decline in the unemployment rate could undermine the credibility of a lower unemployment rate as a threshold for raising interest rates in the context of a renewed attempt by the Fed to taper QE.