Emerging Markets Debt Daily
Global Growth Revisions – EM-DM DivideNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyApril 27, 2021
EM are still expected to grow faster than DM in 2021, but the growth differential is narrowing. A prospect of the far-left political turn in Peru is weighing on local assets.
The recent growth forecast revisions show a divide between emerging markets (EM) and developed markets (DM). The real GDP growth forecast for Developed Markets (DM) was raised by nearly 1% between December 2020 and April this year, led by Australia, Canada, and especially the U.S. (see chart below). The upside revision for Emerging Markets (EM) is about one half of DM’s. India leads EM revisions, which is a bit concerning because the country is going through the ferocious COVID resurgence (=potential for near-term growth downgrade). The 2021 growth differential between EM and the U.S. is still expected to remain positive, but it narrowed to 0.73% from 2.6% in December – food for thought for growth-sensitive EM assets.
A prospect of the far-left political turn is weighing heavily on Peruvian assets. The sol had been the worst-performing EM currency after the first round of presidential elections. The S&P/BVL Peru General equity index is down by about 9%, and the 10-year local government bond yield widened by ~90bps. Meanwhile, the radical left candidate Pedro Castillo is extending his lead in the polls going into the runoff. Now, there are precedents in the region when leftist politicians made policy U-turns once elected – so current valuations are on our watch-list. But the Peruvian election is a cautionary tale – especially for countries that will be facing their own presidential elections next year, and where left-leaning politicians are doing well in the polls (Brazil, Colombia).
Brazil’s inflation continues to grind higher – up to 6.17% year-on-year in mid-April – but it’s no longer driving the market expectation of near-term rate hikes (stable at 80bps for May’s meeting). The reason is that the 2021 budget stalemate between the government and the congress is over, so we can move on and focus on budget execution.
Charts at a Glance: Global Growth Revisions – DMs in the Lead
Source: VanEck Research; Bloomberg LP
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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.
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