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Emerging Markets outlook
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Amidst all the bad news − some good news
Tue, Dec 16 2008, 14:25 GMT
by Lars Christensen, Lars Rasmussen
Agenda
Market overview
- Emerging Markets remain under pressure
- and a look at some of the more spectacular stories
Macro overview
- The bad news: The horrific growth slowdown
- The good news: Inflation is coming down fast
Q&A session
Published on Tue, Dec 16 2008, 14:25 GMT
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Black October, black November
Wed, Nov 19 2008, 15:08 GMT
by Lars Rasmussen
Agenda
Markets update
- IMF has been busy
- Financial markets plummeted
- Economic indicators turned more sour
Regional outlook
- EMEA
- CEE/Baltics
- CIS
- LATAM
- Asia
Q&A session
Published on Wed, Nov 19 2008, 15:08 GMT
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IMF's busy travel itinerary
Thu, Oct 16 2008, 15:59 GMT
by Lars Christensen
Agenda
- - Markets status
- - It all started in Reykjavik
- Travel itinerary for the IMF - a look at credit default swaps
- - Regional outlook
- EMEA
- CEE/Baltics
- CIS
- LATAM
- ASIA
Published on Thu, Oct 16 2008, 15:59 GMT
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US ressesion fears
Mon, Jan 7 2008, 15:58 GMT
by Danske Research EmergingMarkets Team
US outlook has worsened
- Since our last EM-briefer, the outlook for the global economy has deteriorated further, and we have, as consequence, revised our forecast further down for GDP growth in the US and Euroland.
- We now believe the Fed will cut interest rates by 1.0%-point during H1 08 and the ECB will start cutting in H2 08. With both the Fed and the ECB cutting rates, the important question is if the monetary tightening cycle in EM is close to its peak and if possible could start easing later in 2008 or 2009.
Will the Emerging Market decouple?
- With a few exceptions, we do not think so. Growth will still be relatively strong in most emerging markets, and recent spikes in inflation rates will tie the hands of the local central banks.
- The weaker global growth outlook has created some downside risk to our Emerging Markets view. In particular, if commodity prices begin to drop and risk aversion rises sharply, we could see some underperformance, but in general we expect BRIC and emerging Asia.
Published on Mon, Jan 7 2008, 15:58 GMT
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The evil double whammy
Mon, Dec 3 2007, 14:43 GMT
by Danske Research EmergingMarkets Team
Another month with high volatility
- November brought renewed turmoil to the global financial markets and the impact was also felt on the Emerging Markets. Initially the traditional high-beta markets Turkey and Brazil came under pressure.
- It seems like the markets have calmed down a bit now on renewed hope that the Federal Reserve will come to the rescue once again with rate cuts.
How will EM weather external shocks?
- Going forward it is obvious that the global credit crunch will also hit the Emerging Markets, most predominantly in the liquidity-hungry economies.
- Secondly, in the last year inflation has risen significantly in most Emerging Markets mainly through the supply side of the economies via higher energy and food prices. This will hit consumers purchasing power in Emerging Markets and limit growth in domestic demand.
Published on Mon, Dec 3 2007, 14:43 GMT
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The central banks' new dilemma
Fri, Nov 2 2007, 17:20 GMT
by Danske Research EmergingMarkets Team
The positive EM sentiment continued in October...
- October has brought another Fed cut, continued USD weakness, and surging commodity prices. The positive Emerging Markets (EM) sentiment we saw in September has carried on into October as most EM currencies have moved more strongly and local equity markets have set new records.
- Higher commodity prices have indeed supported external balances in those countries that are net-exporters of commodities, and have thus stimulated the respective currencies. In particular the Latin American region has benefited from this.
...But how will authorities react to higher inflation?
- There are good reasons to believe that Asia will continue to look very strong. While this naturally should support performance in those markets, it also adds to an increased probability of event risks - eg, local authorities may consider imposing capital restrictions.
- We expect CEE currencies to outperform EUR, and major LATAM currencies to outperform USD. But one should not forget that chances of more negative events can hit the markets - mainly from the financial sector, but also from a less positive outlook for US growth.
Published on Fri, Nov 2 2007, 17:20 GMT
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Between Ben's helping hand and renewed credit concerns
Tue, Oct 2 2007, 06:41 GMT
by Danske Research EmergingMarkets Team
A strong rebound
- • Over the last month we have seen a remarkable rebound in Emerging Markets sparked to a large extent by the Federal Reserve’s aggressive 50bp rate cut on September 18.
- • The cut has boosted the global stock markets as well as Emerging Markets as they often trade on the back of changes in global risk appetite.
Asia looks strong
- • Looking ahead we would focus on two sets of news. First, the earnings season continues, which adds to event risks. Second, we still need to see what impact the global credit crunch has had on global economic growth.
- • We remain very positive on the Asian currencies and we urge caution on the highly imbalanced markets.
Published on Tue, Oct 2 2007, 06:41 GMT
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Credit scare what about Emerging Markets?
Thu, Aug 2 2007, 06:51 GMT
by Danske Research EmergingMarkets Team
Emerging markets are vulnerable...
- Recent turmoil in the sub-prime mortgage market and credit market in general could be regarded as the start of re-pricing of risks on a global scale and risk premiums returning to “normal” levels or worse the start of a global credit crunch.
- As yet the impact of the credit scare has been modest on emerging markets but they are vulnerable and could be next in line.
...and focus should return to fundamentals
- The risk of further worsening of global credit conditions warrants a reduced exposure to high emerging markets currencies such as the TRY, ZAR, IDR, PHP and MXN.
- With possible re-pricing of risk we will be looking for emerging markets with solid domestic and external balances such as the CIS markets and some of the Asian markets.
Published on Thu, Aug 2 2007, 06:51 GMT
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Emerging Markets: Jitters after rising bond yields
Fri, Jun 8 2007, 16:06 GMT
by Lars Rasmussen
Ten-year treasury yields climbed a whopping 17bp yesterday as the fixed income markets sold off across the board. This morning we have seen more softness in the US bond market, which now leaves 10-year yields at 5.24%, while two-year yields have risen to 5.04%.
Rising US bond yields normally tend to weigh negatively on high-yield / high-beta Emerging Markets (EM) currencies such as BRL, MXN, IDR, PHP, ZAR, TRY, HUF etc. Remember that the broad-based sell-off in May-June last year was preceded by an 80bp rise in 10Y US bond yields between the end of January and the beginning of May. Looking at US yields since the beginning of March this year we note that 10Y yields have now moved up by almost 65bp. Last year yields and rates were mainly driven up by rising inflation fears and that led to a spike in risk aversion and consequently a major sell-off. This year things look a bit different, as bond yields mainly are driven up by a stronger-than-expected outlook for US (and global) growth without large (short-term) fears on inflation see Global Scenarios June 2007, June 1, 2007. Strong global growth weighs positively on performance in EM currencies and this had until a few days ago counteracted the nega-tive impulse from rising US yields as risk appetite has remained at high levels.
The global markets have aggressively priced in this Goldilocks-scenario in most EM currencies. Looking at performance over the last couple of months, we note that currencies such as the BRL, MXN, ISK, ILS, IDR, PHP, INR and TRY have performed remarkably well, while ZAR stands out as an exception. Most of these currencies are, according to our empirical models, the most sensitive to rising US bond yields c.f. the chart below and it is therefore only natural that they take a beating at the moment..
Over a longer-term perspective we expect that USD related currencies will outperform EUR related curren-cies, due to our longer term view of a stronger USD. Having said that, we would recommend investors in the short run to stay away from BRL, MXN, IDR, and PHP, which in spite of improving fundamentals are always vulnerable during periods of rising yields and volatility. In the Eurozone we think that especially HUF (and to some extent PLN and SKK) could suffer as well, whereas we think that the CZK will probably not move much weaker see Flash Comment - Czech Republic: The Czech economy keeps speeding ahead, June 08, 2007. Regarding the South African rand (ZAR) which has already underperformed over the last months, we do not see any support for this currency and it could very well go above USD/ZAR 7.50 in the coming days.
The Turkish lira (TRY) has during the last few days outperformed its peer EM currencies as it has only faced limited weakening so far. As TRY is by far the most yield-sensitive EM currency and given the high degree of political uncertainty, we think that the TRY is facing more weakness in the coming days also compared with BRL, MXN, IDR, ZAR etc. See chart overleaf
Published on Fri, Jun 8 2007, 16:06 GMT
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Giving up on the greenback
Fri, Jun 1 2007, 17:05 GMT
by Danske Research EmergingMarkets Team
China and Kuwait allow for more FX flexibility
- Over the past month Kuwait has changed its fixed exchange rate policy from a USD peg to a peg against a basket of currencies.
- The mood in Emerging Markets has remained bullish, driven by a high risk appetite. The USD sensitive currencies in Asia and LATAM have been the big winners, driven by the USD rebound and the appreciation of the renminbi.
Others are likely to follow especially Russia
- Other countries are likely to try to dampen inflationary pressures by allowing for faster appreciation against the USD Russia is likely to be the first major Emerging Market to move in this direction.
- The continued rise in G3 yields makes us nervous for the sustainability in the Emerging Markets bull run. The political crisis in Turkey is still a major risk for Emerging Markets.
Published on Fri, Jun 1 2007, 17:05 GMT
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Turkish risks, but no delight
Wed, May 2 2007, 08:50 GMT
by Danske Research EmergingMarkets Team
Turkish tension spoils carry fun
- Going into April, the financial markets looked quite supportive for the Emerging Markets. The positive sentiment gained support from a relatively strong global growth picture, with Europe performing better than expected and China re-accelerating.
- Therefore the high yielders like BRL and TRY continued to perform very well, bringing them to very strong levels. Our concern is when looking ahead these levels are unsustainable and that some correction cannot be avoided at some point when a trigger arrives.
Will Turkish jitters spill-over to Emerging Markets?
- This trigger might very well be the Turkish presidential elections, which have led to a sharp rise in risk premiums in the Turkish markets.
- If the situation in Turkey makes a turn for the worse it is very likely that this will spill-over significantly into other Emerging Markets - especially the other high-yielding crowded trades such as South Africa, Brazil and Iceland.
Published on Wed, May 2 2007, 08:50 GMT
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15 British sailors and weaker US growth
Mon, Apr 2 2007, 16:04 GMT
by Danske Research EmergingMarkets Team
March was an eventful month for Emerging Markets...
- It has been a dramatic month in the Emerging Market universe. The sell-off in risky assets that began at the end of February continued in the first weeks of March, with the high yielding currencies suffering.
- However, in the second half of March everything reversed: high-yielding currencies rebounded, the yen weakened and equities started to perform relative to bonds again. It seems that the crisis with a rise in risk aversion is over for now.
...US growth and geopolitical risks will set tone in April
- The recent data flow out of the US has, at best, been mixed. The US growth picture has turned more negative in the past month. We still think that US growth will remain in place, but a re-acceleration towards trend is not on the cards before H2 and this could weigh negatively on Emerging Markets assets in the coming months.
- If the deadlock between Iran and the UK carries on it will continue to underpin oil prices. If it gets worse, global risk appetite may decline.
Published on Mon, Apr 2 2007, 16:04 GMT
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Third round to the CEE bears?
Thu, Feb 1 2007, 11:56 GMT
by Danske Research EmergingMarkets Team
In the previous edition of Emerging Markets Briefer we suggested that the Central and Eastern European markets would lose momentum relative to the LATAM and Emerging Asian markets on the back of rising optimism about the US economy relative to Europe. Economic data released during January have clearly supported this view . with US numbers continuing to surprise on the upside, while European data have generally been fairly soft. This ongoing shift in the perception US vs. European growth has likely been one of the main reasons behind the sell-off in CEE currencies in recent months. And indeed a look at charts 1 and 7 below clearly shows that that the key driver in EM FX markets over the past month has been EUR/USD sensitivity. The top performers were mostly the Emerging Asian currencies, which normally tend to correlate positively with the USD.
Looking ahead, we think January.s theme is likely to carry on into February, as we see the US economy continuing to surprise on the upside, while we expect the European economic data to point moderately down. Therefore, we continue to recommend being short in the CEE markets and, in general, long in the USD-sensitive markets . especially in Emerging Asia, but also on a more selective basis in the LATAM currencies. Meanwhile, we are, however, concerned about increasingly populist policies in certain LATAM countries, like Venezuela and Ecuador. Focus in LATAM will probably centre on the Ecuadorian debt payments due on February 15 . will payment be made (on time)? Fears of an Ecuadorean default are likely to rise further. January.s jitters were generally confined to the core CEE countries, but we think there is a risk the sell-off might spread in February. We would especially watch some of the currencies that .avoided. the January tumble, particularly a number of the high-yielders, such as the Turkish lira and the Brazilian real. We would definitely also watch the Romania leu, which until now has outperformed the core CEE currencies.
Given the high interest-rate sensitivity of both the BRL and TRY, one could expect the approximately 50bp rise in US 10y bond yields over the past two months to weigh on these currencies. Hence, given the prospects of a further rise in US bond yields during February, the sell-off could spread to the CEE high-yielders as well. Also worth noting is that the rise in US bond yields since the beginning of December corresponds to about half the rise that preceded the Emerging Market turmoil witnessed in May-July last year. This alone should make investors more cautious, and we obviously recommend not being overly exposed to high-yielders in February. A joker in the month ahead will again be the market.s favourite funding currencies . the JPY and CHF. Both currencies have continued to weaken, but policymakers around the world are clearly concerned about this trend and we would expect the weakness of, especially, the JPY to come up at next week.s G7 meeting.
Keep track, too, of renewed speculation concerning a revaluation of some Gulf state currencies, most notably the Kuwaiti dinar. Such speculation could benefit the MEA currencies . especially the EGP.
Published on Thu, Feb 1 2007, 11:56 GMT
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Here comes the bandwagon
Fri, Dec 1 2006, 16:12 GMT
by Danske Research EmergingMarkets Team
Nervousness triggered by USD weakness...
- In last month’s Briefer, we wrote that the EM markets would be "Waiting for the bandwagon" in November. This bandwagon might very well have arrived through the continued dollar weakness.
- The dollar weakness has accelerated over the last week and this has sparked a wave of renewed risk aversion in the global financial markets - especially in the LATAM and Turkish FX markets.
...should continue in December
- We believe that the USD weakness will continue, and EUR/USD could soon be testing 134. So, look for more Emerging Markets softness in the coming month.
- Especially the LATAM region and other USD-sensitive markets, such as the Turkish markets, are looking fragile.
Published on Fri, Dec 1 2006, 16:12 GMT
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Waiting for the bandwagon
Thu, Nov 2 2006, 09:00 GMT
by Danske Research EmergingMarkets Team
Risk appetite was in the driver’s seat…
- October saw a dramatic change in market sentiment as high global risk appetite took over as the dominant theme, with volatility across asset classes and Emerging Market bond spreads at record lows.
- Especially high yield/high volatility markets - such as the South African rand, the Turkish Lira, and the Hungarian forint - benefited from this.
…waiting for triggers in November
- November will be a wait-and-see month, with investors searching for the triggers that will move the market.
- Some market positions are beginning to look quite overstretched - especially in CEE currencies, the Turkish lira and some of the high-yielding non-EM currencies like ISK and NZD. We recommend using the low volatility to reduce exposure to high volatility EM positions.
Published on Thu, Nov 2 2006, 09:00 GMT
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Shaky New Europe
Mon, Oct 2 2006, 15:24 GMT
by Danske Research EmergingMarkets Team
Risk aversion on the rise…
- Demonstrations in Hungary, the de facto collapse of the Polish government, the military coup in Thailand, and new political scandals in Brazil led to increased risk aversion in September.
- Falling energy prices in September have affected external balances in Emerging Markets negatively in LATAM and CIS countries and positively in Asian countries.
…and New Europe will scare investors
- Demonstrations in Hungary, the de facto collapse of the Polish government, the military coup in Thailand, and new political scandals in Brazil led to increased risk aversion in September.
- Falling energy prices in September have affected external balances in Emerging Markets negatively in LATAM and CIS countries and positively in Asian countries.
- Focus in October will continue to be on political uncertainty in Emerging Markets. Will the Hungarian Prime Minister stay put after the beating in yesterday’s local elections? Can the Polish government survive? Is Lula up for victory in the second round elections in Brazil?
- Renewed focus on external imbalances - especially in Central and Eastern Europe
Published on Mon, Oct 2 2006, 15:24 GMT
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Fed is off the agenda
Wed, Sep 6 2006, 14:49 GMT
by Danske Research EmergingMarkets Team
Carry has been the name of the game Looking back at August
- Continued focus on carry trades driven by the “Fed on hold”-view
- High volatility and high yield currencies like TRY and BRL has outperformed - the same can be said for the high yield fixed income markets
- Among the positive surprises have been especially SKK that have appreciated on expectations of higher rates
- HUF has suffered due to fiscal concerns
- Concerns over the C/A has contributed to KRW under performance
Risk aversion to rise and refocus on global imbalances - outlook for September
- US economy and the Fed is moving down on the EM agenda - as consensus on the near term outlook increases (clear that Fed is on hold - for now)
- Global bond yields will be less supportive of the general investor sentiment
- Instead, the G7/IMF meetings may receive some attention. These events could be positive for Asian currencies
- LATAM politics will re-appear on the EM agenda with the Brazilian elections on October 1. This could trigger some nervousness in LATAM markets in September.
- Risk aversion could rise during September
Focus on Asian currencies
- G7/IMF meetings on Sept 18/19 will bring renewed focus on Asian currencies
- The meetings will make us wiser on the future role of the IMF in addressing global imbalances
- Is G7/IMF satisfied with China’s efforts to increase the flexibility of the renminbi?
- China is unlikely to make any major moves close to the meeting - however the meetings could be positive for Asian currencies, notably CNY, SGD, MYR
Published on Wed, Sep 6 2006, 14:49 GMT
Archive
- Amidst all the bad news - some good news
Published On Tue, Dec 16 2008, 14:25 GMT - Black October, black November
Published On Wed, Nov 19 2008, 15:08 GMT - IMF's busy travel itinerary
Published On Thu, Oct 16 2008, 15:59 GMT - US ressesion fears
Published On Mon, Jan 7 2008, 15:58 GMT - The evil double whammy
Published On Mon, Dec 3 2007, 14:43 GMT
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