Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
August 28, 2020
EM fundamentals are expected to look stronger than DM in both 2020 and 2021. Many EMs continue to show textbook adjustment of their trade balances, which leads to positive feedback loops in the economy.
The Daily Blog goes on vacation next week. We hope that breaking the daily routine will give us more time to focus on “big picture” things, such as the fact that both the IMF and “we the market” see stronger fundamentals in emerging markets (EM) compared to their developed markets (DM) counterparts (see chart below) in both 2020 and 2021. This covers all major metrics—growth, fiscal performance and debt ratios. And emerging markets now account for a larger share of the global economy. And the market still demands a higher risk premium for EM assets. Just think about it.
Many EM continue to show textbook adjustment of their external accounts in the current crisis, which is a testament to their more orthodox policy setups. Weaker domestic activity and weaker currencies sharply reduced demand for imports, often leading to larger trade surpluses—like yesterday in Mexico and today in Malaysia. This helps to offset losses on other current account items (such as tourism, for example), reducing pressure on currencies and supporting a positive feedback loop in the economy.
Turkey’s economic confidence edged higher in August. However, the advancement looks quite modest against the backdrop of a major credit surge (25% year-on-year in Q2)—which raises a question mark about the latter’s efficacy. Add to this the central bank’s “backdoor” tightening—the average cost of the central bank’s funding rose by 266bps since mid-July—and you end up with a bunch of near-term growth headwinds for the country. Turkey’s case is a good illustration of why it is important to be selective in EM, despite the latter’s “big picture” strengths.
Chart at a Glance: EM – Larger Share of Global GDP, Better Fundamentals
Source: VanEck Research; IMF(*); Bloomberg LP
IMPORTANT DEFINITIONS & DISCLOSURES
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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