Reviewing Our 2023 EM Assumptions
February 21, 2023
Read Time 2 MIN
EM Tightening Cycle
Emerging markets’ (EM’s) credible and pro-active policy response to rising price pressures and China’s rebound are among key factors underpinning our 2023 outlook for EM bonds. How have these assumptions been holding so far this year? EM monetary authorities are passing with flying colors. EM inflation is moderating, but various central banks are not taking any chances and staying cautious, as the process of disinflation is rather bumpy and might take longer than previously thought. Mexico and the Philippines raised their respective policy rates by more than expected earlier this month, and even central banks that stayed on hold signaled that the bar for rate cuts is very high. The latest hawkish surprise came from Israel, where the central bank opted for a larger 50bps rate hike yesterday, instead of expected 25bps, and signaled more tightening, because activity and inflation turned out much stronger than expected.
China Rebound
EMs’ relatively high real interest rates (vs. developed markets (DM)) provide a nice policy cushion against the (potentially) more hawkish U.S. Federal Reserve (Fed), but for this cushion to translate into actionable trades, a decent growth outlook is often a must. China’s rebound is an important driver here, and various gauges/high frequency indicators show that domestic activity is definitely bottoming out. We are also hearing about additional policy measures to prop up the housing sector and promote bank lending – such as draft new rules on banks’ risk-weighting and a pilot scheme to allow real estate investments by private equity funds. Still, there are plenty of questions about the recovery’s timeline – especially as regards consumption. A recent sell-side report suggested that excess savings might be smaller and partly used for precautionary purposes. Further, the use of excess savings might be slower initially, pushing the recovery to H2/early 2024.
Global Growth Outlook
China is not the only growth story we are watching – the growth outlook in advanced economies is also important, especially for more open EMs (note that the economic surprise index for EM exports is still in the red – see chart below). February’s preliminary activity gauges for the Eurozone (PMIs, or Purchasing Managers Indices) looked mixed – a very strong reading for the services PMI (53.0), but the manufacturing PMI (48.5) remains contractionary. The U.S. PMIs looked almost as “conflicted” – the expansionary services PMI and the contractionary manufacturing PMI – except that manufacturing was better than expected. There was nothing in the release to suggest that the Fed should stop hiking – so, it’s good that EM central banks are en garde. Stay tuned!
Chart at a Glance: EM Export Surprises – Still in the Red
Source: Bloomberg LP.
Citigroup Economic Surprise Index (CESI) tracks whether a core set of economic data series has been coming in under expectations, at expectations, or over expectations.
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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.