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Taking stock of EM performance so far in 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

 

SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T: +44(4)387 5031
E: soojin.kim@uk.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

 

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

Macro focus

Our 2024 EM outlook (see here) postulated that major EMs were “over the hump” from COVID-related adjustments and monetary policy tightening. We projected EMs on aggregate to deliver a robust 4.0% real GDP growth, further disinflation and a broadening in monetary easing. Thus far, our views have weathered the first five months of 2024 well. Growth is accelerating across the EM complex. Disinflation continues. The easing in monetary policy is broadening (in aggregate), albeit moderately. We reiterate our annual outlook perspective that a bottom-up (not top-down) examination is warranted to differentiate winners and laggards across the EM complex in 2024. We contextualise three filters in our EM criteria to pick out outperformers – in essence comprise one of the three “S’s”, namely, “strong” fundamentals, “structural” narratives and “sizable” risk premiums, and recommend macro stabilisation markets (Brazil, Mexico, Poland and Turkey) and structural growth narratives (GCC region, India and Indonesia).

FX views

A stabilisation of US yields has allowed EM FX to recover, and we think this move could extent further, especially given that the sensitivity of EM FX returns to US yields has been increasing over the last few years. Moreover, with real trade-weighted valuations for EM FX near their highest levels in the last decade, the prospect for outsize returns is constrained by the USD’s trajectory, which we expect to erode only slowly. And, on the other side, the combination of a rising sensitivity to US yield moves and a lower FX carry buffer could imply that EM FX continues to exhibit a high vulnerability to hawkish US data shocks.

Week in review

Rates were kept on hold in Egypt (27.25%), Israel (4.50%) and Turkey (50.00%) but eased by 50bps in Hungary (7.25%). Meanwhile, South Africa’s inflation eased in April (-0.1ppt to 5.2% y/y).

Week ahead

This week, South Africa will hold general elections (29 May) and an MPC meeting (30 May). The preliminary inflation print for May will be released in Poland (31 May). Finally, Q1 GDP data will be released in Turkey (31 May).

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 fund flows attracted USD1.4bn in the week ending 24 May – fifth consecutive week of inflows.