PBoC is the game changer

Last week in a surprise move the People's Bank of China (PBoC) cut interest rates. The interest rate cut is extremely positive for risk sentiment and risky assets in general in financial markets, and it is particularly positive for emerging markets and commodities. Hence, it should help commodity and Emerging Market currencies like the Brazilian real, the South African rand, Mexican peso and of course the Russian rouble

In the light of the PBoC move our allocation has changed quite a bit this month. We have moved South Africa from neutral to positive, and after many months Russia has moved fro m negative to a neutral allocation. However, we still maintain Mexico in an underweight allocation despite the easing from the PBoC.

Overweight: Hungary (+ 15.5 % ) , South Africa (+9.2%)

We maintain Hungary in overweight. We continue to believe that Hungary’s fairly strong external position is likely to be supportive for the HUF in the medium term, a s will the solid growth. South Africa has moved to overweight as we expect the easing from the PBoC to have positive effect , given that South Africa is a commodity exporting country and that China is its main trading partner.

Neutral: Turkey (+ 1.4%), Poland ( - 4.6 % ) , Russia ( - 5.0 %)

For the first time in many months Russia has been moved from an underweight allocation, given that the Russian markets have sold - off s o strongly recently and that the rouble has moved closer to its fair value . Poland stays in neutral , as we believe that the reluctant Polish central bank will protect the PLN.

Underweight: Mexico ( - 16.9%)

We maintain Mexico at underweight. T he economy has no t been recovering as fast as previously expected and ongoing demonstrations against the government a re negative for the MXN.