Natalia Gurushina, Economist, Emerging Markets Fixed Income
January 31, 2020
China’s official activity gauges showed no signs of an early impact from the coronavirus. Headwinds to South Africa’s growth remain strong as power blackouts may intensify in the coming months.
China’s official activity gauges for January (Purchasing Managers’ Indices or PMIs) looked counter-intuitive—there were no signs of an early impact from the coronavirus. A modest decline in the manufacturing PMI most likely reflected the timing of the Lunar New Year celebrations and was fully expected. The services PMI actually strengthened to 54.1 against the consensus expectation of a decline. The manufacturing new orders and employment PMIs were also stronger. There is, of course, a possibility that the past stimulus is having a stronger impact—especially in the public sector. Another possibility, however, is that the numbers were affected by statistical sampling and will show a bigger drop in February, which will be followed by a concerted policy effort to help the economy to regain its footing.
More headwinds for South Africa’s growth? The chief executive officer of the state-owned utility Eskom warned that the probability of blackouts has increased and that the grid will remain vulnerable in the next year and a half. The growth assumptions for the next budget will, therefore, be closely watched— albeit we think that there is room for maneuver on the public wage bill side that can help to mitigate the negative impact, potentially providing upside for local bonds. For a more general discussion about investment opportunities in emerging markets debt, I would highly recommend you listen to Portfolio Manager Eric Fine’s quarterly webinar (Emerging Markets Debt: Opportunity Amid Euphoria) and check out Portfolio Manager Fran Rodilosso’s blog Where to Find Value in High Yield Bonds, in which he argues that emerging markets high yield corporate bonds’ valuations look attractive compared to U.S. high yield.
The positive side effects of Brazil’s disinflation and fiscal drives are increasingly showing in the monthly budget statistics. The general government’s primary and headline deficits narrowed to 0.85% of GDP and 5.91% of GDP respectively in December. Annual interest payments are now down to 5.91% of GDP and the number is expected to decline further as inflation and the neutral policy rate get anchored at low levels. Further structural reforms are key, but at least there is a light at the end of the proverbial tunnel.
IMPORTANT DEFINITIONS & DISCLOSURES
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
Web Access Notice: VanEck is committed to ensuring accessibility of its website for investors and potential investors, including those with disabilities. If you have difficulty accessing any feature or functionality on the VanEck website, please feel free to call us at 800.826.2333 or email us at firstname.lastname@example.org for assistance.
This website is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this website. Nothing on this website should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
Investing involves risk, including possible loss of principal. An investor should carefully consider investment objectives, risks, charges and expenses carefully before investing. This and other information can be found in the appropriate regulatory documents made available for a specified country as designated in this website.
Van Eck Associates Corporation 666 Third Avenue New York, NY 10017800.826.2333