Emerging Markets: What Has Changed?

In the EM equity space as measured by MSCI, Hungary (+3.0%), UAE (+2.0%), and Qatar (+0.7%) outperformed last week, while Mexico (-3.4%), South Africa (-2.1%), and Colombia (-1.7%) underperformed. To put this in better context, MSCI EM fell -1.2% this past week while MSCI DM fell -0.3%.

In the EM local currency bond space, the Philippines (10-year yield -22 bp), Singapore (-12 bp), and Brazil (-11 bp) outperformed this past week, while Russia (10-year yield +17), Turkey (+12 bp), and Colombia 10-Year (+8 bp) have underperformed. To put this in better context, the 10-Year UST yield fell -5 bp this week to 1.40%.

In the EM FX space, ARS (+2.3% vs. USD), HUF (+1.0% vs. EUR), and CZK (+0.3 vs. EUR) have outperformed this past week, while BRL (-1.8% vs. USD), MXN (-1.7% vs. USD), and KRW (-1.4% vs. USD) have underperformed.

Political tensions on the Korean peninsula are rising. North Korea turned more belligerent on two developments:

• 1) The US and South Korea agreed to deploy an advanced US missile defense system in response to the growing threats from the North and
• 2) The US Treasury imposed financial sanctions on North Korean leader Kim Jong-Un for the first time.
  

The IMF cut its growth forecasts for South Africa. The agency now sees 2016 growth of 0.1% vs. 0.6% previously. This positions the IMF as more bearish than the market, with Bloomberg consensus for 2016 growth at 0.5% currently. This wasn’t a huge surprise, but it does underscore the risks facing South Africa. Rating agencies have highlighted the poor growth outlook as potential triggers for a downgrade. Our base case remains a downgrade to sub-investment grade by at least one agency before year-end.

Brazil announced its 2017 budget target. The primary deficit target of -BRL139 bln is not as bad as press reports suggested (-BRL150 bln), but neither is it that awe-inspiring. We think this is largely neutral for markets and BRL.