Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
September 18, 2020
The market expects China to be included in FTSE World Global Bond Index. EM overseas remittances prove more COVID-resistant than initially feared.
The decision on China’s global bond index inclusion is getting nearer. Policymakers are preparing for potential big inflows, and the market is getting excited. FTSE Russell1will hold its annual review of the World Government Bond Index (WGBI)2on September 24, and China is expected to get an invite. In the meantime, authorities continue to gradually open up China’s capital markets. The latest initiatives include simplifying procedures for cross-border yuan settlement and lifting yuan reinvestment curbs for some foreign companies.
One important and encouraging development in lower-income emerging markets (EM) is that overseas remittances are doing much better during the COVID crisis than initially feared. There is a great deal of divergence among individual countries (see chart below), but the overall year-to-date change in remittances is nowhere close to a 20% drop expected by the World Bank back in April. Remittances can be quite sizable as percentage of GDP, so stronger inflows are an important source of support for current account balances, as well as a major tailwind for GDP growth.
Russia just had another “Jekyll and Hyde” moment. Russia’s “Dr. Jekyll” personality showed up via the central bank’s prudent decision to stay on hold at 4.25%. The government’s guidance for fiscal consolidation in 2021-2023 (issued earlier this week) falls into the same category. However, persistent political and geopolitical noise (“Mr. Hyde”) is more problematic, and its market impact should not be ignored.
Chart at a Glance: EM Remittances – Exceeding Expectations
Source: VanEck Research; Bloomberg LP
1FTSE Russell: a British provider of stock market indices and associated data services, wholly owned by the London Stock Exchange (LSE).
2FTSE World Government Bond Index (WGBI): measures the performance of fixed-rate, local currency, investment-grade sovereign bonds.
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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