As Easter and spring are upon us, everything does not look as bad as it would seem. In our recent Emerging Markets Briefer (15 April) we raised our concerns regarding the events in Ukraine and acknowledged the possible consequences an escalation could have on the market. However, as some of the major economies seem to be continuing to recover, the Chinese slowdown is hoped to be bottoming and in some emerging market countries the political risk has eased (such as Turkey), we believe it is supportive for overall global emerging markets sentiment. This said, the geopolitical risks from the Ukraine-Russia conflict clearly linger in the market.

Our allocation this month is fairly neutral with no major changes compared with last month. The major changes are Poland and Turkey moving from an underweight to a neutral allocation this month, due mostly to some political risks in Turkey being out of the way.

Overweight: Mexico(+7.4), Hungary (+7.1), South Africa (+6.1)

As some risk appetite returned, the Mexican peso gained some ground and, given our fairly positive outlook on the Mexican economy’s recovery, the MXN could strengthen further. This said, the recovery of the US economy and stable oil prices are crucial. Hungary’s fairly strong external position supporting the forint has moved Hungary to an overweight allocation this month. In the short term, the HUF depends on the general emerging market outlook but longer term we believe the HUF could strengthen against the EUR. South Africa keeps an overweight position, because the South African rand has also gained some ground supported by positive domestic economic data. Albeit on a longterm horizon, we remain bearish on the rand given its fundamental overvaluation.

Neutral: Poland (3.3), Turkey (-6.4)

Although the Polish zloty is supported somewhat by Polish fundamentals, risks regarding the outlook for the Polish economy and the Ukraine-Russia conflict remain highly elevated. The high Turkish interest rates are likely to provide some support for the lira but the continued large macroeconomic imbalances, political risks and overall fragile global emerging markets environment are key risks for the Turkish lira.

Underweight: Russia (-17,4)

Russia has kept its underweight allocation for several months in a row. The main risks continue to be geopolitical, monetary tightening and global risk sentiment.

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