Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
August 05, 2020
EM growth downgrades are over for now – the sizable stimulus and the weaker U.S. Dollar give a helping hand. Turkish rates and currency remain under pressure this morning, concerns about economic policies persist.
Our strong conviction is that having a death-of-the-U.S. Dollar theory is neither a good theoretical nor a practical guide for EM active investing. Nonetheless, a weak U.S. Dollar is often associated with rising EM growth (and vice-versa - see chart below). So, while backward-looking GDP prints in EM look understandably horrifying (like today’s Q2 GDP contraction in Indonesia), a combination of the large-scale policy stimulus and the weaker “greenback” brightens the near-term outlook. This fact is already reflected in the consensus growth forecasts for 2020 – the downgrades appear to be over for now.
Emerging markets are increasingly seeing the light at the end of the proverbial tunnel, and this helps to explain why many central banks are taking a pause or ending their rate-cutting cycles. Thailand’s central bank kept the benchmark rate on hold for the second month in a row at 0.5%, expecting a gradual recovery as the remaining restrictions are lifted. Brazil is widely expected to deliver the last 25bps rate cut later today. Brazil’s inflation outlook leaves room for additional easing, but the fiscal situation (2020 budget deficit is expected to exceed 15% of GDP) is a major argument for policy caution.
The morning brought no respite for Turkey’s currency and rates (the stock market is holding on there). The lira underperformed peers by a wide margin (down by 200bps vs. U.S. Dollar according to Bloomberg LP, as of 9am ET), local short rates are moving up, and the entire sovereign yield curve is under pressure. There will be no important data releases in Turkey for the rest of the week, and this leaves plenty of time to focus on the rapidly declining international reserves, large-scale currency interventions, and past policy mistakes that led to this unfortunate outcome.
Chart at a Glance: Inverse Relation Between EM Growth and U.S. Dollar
Source: Bloomberg LP
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