Opportunities Still Possible In Emerging Markets

Emerging markets weathered the storm last week relatively well. For example, the EM MSCI (ARCA:EEM) index was down just 1.7%, compared with 2.7% fall in the S&P 500 and a 4.5% fall in the DAX over the same time period. EM FX got hit as well, notable IDR, TRY, CLP and MXN, all down around 1.7% against the USD, but given that CAD, GBP, NOK and AUD were all down about 1.0%, we still saw the moves as subdued.

A combination of overall lighter positioning, better currency defenses and higher (and in some cases rising) rates will continue to support EM going forward. Especially in the equity side, we still think that there is more catch up that EM markets can do vis-à-vis major indices. We note, however, that the post-electoral boosts for India and Indonesia are probably already priced in, but there is still upside for medium to long-term, in our view. This is less clear in the case of the chances of a change of government in Brazil, where markets will continue to gyrate around electoral polls.

Taiwan reports July CPI on Tuesday, expected to rise 1.86%y/y vs. 1.64% in June. On Thursday, it reports July trade, with exports seen rising 6.8% y/y and imports rising 8.8% y/y. Overall, the economy is growing modestly with minimal price pressures, and so we see steady policy ahead for the central bank.

Indonesia reports Q2 GDP, expected to rise 5.2% y/y vs. 5.21% in Q1. Earlier in the week, it reported July CPI easing to 4.53% y/y from 6.7% in June. With price pressures elevated due to subsidized price increases, the central bank should remain hawkish and a hike sometime this year is a possibility. Still, we think Bank Indonesia will remain on hold near-term in order to better gauge the underlying economic trends and the fiscal stance of the new government.

Reserve Bank of India meets Tuesday and is expected to keep rates steady. Inflation measures have been easing, but with the uncertain monsoon season ahead, we believe the RBI will remain on hold for now in order to maintain its credibility in the face of uncertain economic undercurrents.

Czech Republic reports June retail sales, expected to rise 4.5% y/y vs. -0.6% in May. It then reports June IP, trade, and construction output on Wednesday. Though the economy continues to recover, the central bank continues to push out its forward guidance for potential tightening. At its last policy meeting, the bank said that the koruna cap would likely remain in place until 2016.

Hungary reports June retail sales, expected to rise 5.1% y/y vs. 4.9% in May. Hungary then reports June IP and releases central bank minutes on Wednesday, followed by June trade on Thursday. The economic recovery continues, and the central bank signaled that the easing cycle was over after its last 20 bp rate cut last month. Next meeting is August 26, and no change in policy is expected.

Brazil reports July FIPE inflation on Tuesday, expected to rise 5.37% y/y vs. 5.07% in June. The acceleration is largely due to low base effects from 2013. The same effect is likely when it reports July IPCA inflation on Friday, expected to rise 6.6% y/y vs. 6.52% in June. Base effects for both measures will improve in Q4, and will likely keep the central bank on hold for now despite above-target inflation readings in Q3.

Bank of Thailand meets Wednesday and is expected to keep rates steady at 2.0%. Headline inflation eased slightly in July, but targeted core inflation rose to 1.81% y/y from 1.71% in June. While still within the 0.5-3.0% target, the BOT may remain cautious near-term. Yet the economy remains weak, and suggests that the central bank will eventually ease policy.

South Africa reports June manufacturing production on Thursday, expected at -1.6% y/y vs. -3.7% in May. It remains to be seen whether the SARB can continue to hike rates in the face of a weak economy. Next policy meeting is September 18, and the decision will depend on how the data come in over the next month and half.

Chile reports July trade on Thursday, followed by July CPI on Friday. Inflation is seen at 4.4% y/y vs. 4.3% in June, above the 2-4% target range. The economy remains soft even as inflation pressures have not totally eased. Yet when the central bank meets next week, it is expected to cut rates 25 bp again to 3.5%, following the 25 bp cut in July.

Mexico reports July CPI Thursday. Headline is expected to rise 4.05% y/y vs. 3.75% in June, while core is expected to rise 3.24% y/y vs. 3.09% in June. With inflation above the 2-4% target, Banco de Mexico is unlikely to cut rates anytime soon. Indeed, we see the economy picking up in H2 and see steady rates for the rest of the year.

Peru’s central bank meets Thursday and is expected to cut rates 25 bp to 3.5%. However, the market is split. Of the 9 analysts polled by Bloomberg, 5 expect the 25 bp cut while 4 see steady policy. This comes after the bank delivered a dovish surprise in July, cutting rates 25 bp in the first easing move since November 2013. Given how cautious the bank has been in the past, we see risk of no move this week.

China reports July trade on Friday. Exports are seen rising 7.5% y/y and imports rising 3.0% y/y. Over the weekend, it will report July CPI and PPI. The data should continue to show that the world’s second biggest economy is stabilizing, but the focus for policymakers should remain on growth and not inflation.

Turkey reports June IP Friday, expected to rise 2.5% y/y vs. 3.3% in May. Earlier in the week, it reported much higher than expected July inflation of 9.32% y/y, up from 9.16% in June. Core inflation also accelerated. The central bank faces a combination of slowing growth and high inflation, and so its strategy of cutting rates may be tested in the coming weeks. Next policy meeting is August 27, and could prove crucial for Turkish asset performance ahead.