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Emerging Markets mid-year 2024 outlook

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

At the start of this year, we had expected building drags from a slowing China and the 2021-23 global hiking cycle to pull down the EM complex. Yet, EMs defied expectations in H1 2024, buoyed by the resiliency in the consumer. Disinflation has come a long way but progress is now slowing and becoming more heterogeneous across countries. Cautious EM rate cuts looks set to continue in parts of EM EMEA (notably the CEE region) and LatAm, broadening to EM Asia by Q4 2024 – though remains conditional on the Fed and the US dollar. We anticipate EM assets to be held back in H2 2024 by the looming US elections, while macro uncertainties remain unresolved. From a positioning lens, trading a strong global macro trend for EMs does not look like a great risk/reward strategy in H2 2024. On the one hand, there is still a tight US labour market which can generate sticky inflation, with few signs of corporate/household imbalances, so rates may remain higher-for-longer. On the other hand, growth looks to be slowing with the cumulative impact of rate hikes may still be lagging through the economy. Thus, we recommend being market weight across EM local rates, FX and sovereigns, while hiding out in idiosyncratic EM carry.

FX views

The confluence of forces still does not bode well for EM FX (in aggregate), with growth proving mixed, China’s economy staying lacklustre, and US yields remaining elevated. Domestic concerns have also come under scrutiny and particularly for some LatAm FX with fiscal concerns mattering more. Looking ahead, the second half of 2024 may witness a pivot in market focus away from persistent focus around the Fed cycle towards US elections and their impact on EM, especially surrounding the probability of a Republican presidential and/or Congressional victory. The latter is likely to impact EM currencies via four fundamental transmission channels – tariff policy, geopolitics, currency policy and domestic fiscal policy. We recommend leaning long currencies with high carry and/or attractive valuations – MXN, PEN in LatAm, TRY, PLN in EM EMEA and SGD in EM Asia.

Week in review

Inflation in Poland for June rose slightly to 2.6% y/y. The Central Bank of Turkey (CBRT) kept the one week repo rate unchanged at 50.00%, in line with our (and consensus) expectations. The Czech National Bank’s (CNB) cut its key rate by 50bps to 4.75%, representing a dovish surprise to our (and consensus) expectations of 25bps to 5.00%. Finally, Egypt’s overall banking system net foreign assets (NFA) position turned positive (USD14.3bn) for the first time since 2022.

Week ahead

This week, there will be MPC meetings in Poland (MUFG and consensus: on hold at 5.75%) and Romania (MUFG and consensus: -25bps to 6.75%), as well as inflation data for June in Turkey (MUFG: 73.1% y/y; consensus: 72.6% y/y). Elsewhere, key US economic data releases this week will be the ISM manufacturing index (1 July), the JOLTS job openings report (2 July) and the NFP report (5 July).

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

The latest weekly IIF flow data signalled that EM securities witnessed USD-3.2bn of outflows in the week ending 28 June – second consecutive week of outflows from the EM complex.