Commodities a clear drag on EM

Although the financial markets have steadied somewhat following recent jitters, nervousness remains and the sentiment towards emerging markets is still fragile. The uncertain state of the global economy has been evidenced by a mixed bag of economic data, diverging growth prospects across regions, and continued pressure on commodity prices. This suggests that sentiment towards emerging markets will remain fragile.

Concern about the strength of the Chinese economy remains a main cause of anxiety in the markets. As a consequence, commodity prices continue to drift lower, which is hurting commodity-exporting countries. Therefore, we maintain our negative outlook on the currencies of many commodity-sensitive emerging markets, including Russia and Mexico; we include bonds from both countries in our portfolio.

Our allocation this month does not include any big changes compared with last month. We keep Mexico and Russia at underweight, while Hungary remains the only overweight.

Overweight: Hungary (+12.3%)

We remain overweight Hungary. The economy continues to perform fairly well, with Hungary posting the strongest GDP growth within the CEE. We believe the country’s fairly strong external position is likely to be supportive for the HUF in the medium term as will the solid growth.

Neutral: Turkey (+5.6%), South Africa (5.7%), Poland (-0.3%)

We remain neutral on Turkey this month, as the continued high inflation and large current account deficit are likely to weigh on the lira, which we believe will gradually depreciate. We also remain neutral on South Africa. It remains challenged by a large current account deficit and the economy has failed to recover amid an environment of low commodity prices and a weak Chinese economy.

Underweight: Mexico (-8.7%), Russia (-14.5%)

We remain underweight Mexico. The recent soft US economic data, continued weak Chinese economic data and downward pressure on commodity prices are negative for Mexico. We also stay underweight Russia again this month, as we have been for several months. Geopolitical risk remains and the prospect of the oil price staying low is clearly a worry for the Russian economy.