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Taking stock of EM performance in Q1 2024 and contextualising what’s in store for Q2 2024

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

RAMYA RS
Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: ramya.rs@ae.mufg.jp

LEE HARDMAN
Senior Currency Analyst
Global Markets Research
Global Markets Division for EMEA
T: +44(0)20 577 1968
E: lee.hardman@uk.mufg.jp

PAUL FAWDRY
Head of Emerging Markets FX Desk
Emerging Markets Trading Desk
T: +44(0)20 577 1804
E: paul.fawdry@uk.mufg.jp 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Macro focus

Remarkable as it is, EMs have struggled in Q1 2024, despite an easing in global financial conditions and healthier signs of EM portfolio inflows. Hindering headwinds persist, led by a strong US dollar, a patient Fed, firm US yields and a slow China. This still tell us that top down drivers for EMs are not conducive. As we catalogued in our EM 2024 outlook  (see here), the unfavourable growth-inflation mix, higher for longer rates, low liquidity and a strong US dollar poses stark challenges to the top-down EM view – which warrants a bottom-up approach. We believe that investors will be seeking one of the three “S’s” in their EM selection criteria – “strong” fundamentals, “structural” narratives and “sizable” risk premiums. As we enter Q2 2024, we envisage increased growth divergence across the EM complex, EM inflation continuing to ebb and a broadening of EM rate cuts (with a tightening of rate differentials vs DM central banks).

FX views

Whilst global financial conditions have eased year-to-date driven by the risk-positive backdrop in equity markets, most EM currencies have depreciated versus the USD. The top-down drivers remain the same, namely the broad USD, the outlook for the Fed, US yields and China. We do not anticipate this to change in the weeks ahead with only a few currencies able to break away from these forces given more idiosyncratic factors, notably the TRY and EGP.

Week in review

Turkey’s opposition parties significantly outperformed Eurasia Group’s expectations to deal a defeat to President Erdogan in municipal elections. South Africa kept rates on hold at 8.25%. Hungary lowered rates by 75bp to 8.25%. Nigeria hiked rates by 200bp to 24.75%. Finally, Saudi Arabia’s trade surplus narrowed to 7.5bn in January on lower oil exports.

Week ahead

Rates decisions are due in Poland (MUFG and consensus; on hold at 5.75%) and Romania (MUFG and consensus; on hold at 7.00%). Meanwhile, inflation in Turkey for March is due (MUFG: 69.3% y/y; consensus 69.1% y/y).

Forecasts at a glance

Growth across the EM universe is set to stabilise as domestic fundamentals offset external drags, with some rotation from the largest to smaller EMs. Inflation and interest rates are both “over the hump” – disinflation is progressing, and the decline in rates will continue and broaden in 2024 (see here).

Core indicators

According to the IIF, EM securities have now witnessed two consecutive weeks of outflows (USD-0.8bn), following eight weeks of inflows.