To read the full report, please download the PDF above.

Positioning across emerging markets following the recent market volatility

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

The deterioration in market sentiment over the past few weeks caused an aggressive sell-off in risk assets following a recalibration of growth assumptions for the US, as well as an unwinding of JPY-funded carry trade positions. Whilst markets have continued to retrace with investors seemingly keeping the faith in the modal view of continued economic expansion and decelerating inflation (rather than imminent recession), it is still too early to call the end of this turbulence. For emerging markets, whilst there are limited spillovers from US equities and to a lesser extent JPY volatility, it is the health of global economic activity that remains the most critical determinant for EM asset returns. In such an environment, we recommend leaning selective across EM asset classes, with a focus on economies that offer a comfortable policy rate premium over the US as well as a pledge towards fiscal consolidation – Brazil, the CEE region, Egypt, India, South Africa and Turkey all standout, alongside the structural growth narratives of the GCC region.

FX views

The EM FX complex has been at the centre of the broader carry trade unwind over recent weeks with high-carry LatAm currencies underperforming at the start of August. However, this underperformance of EM high-yielding currencies had already started in mid-July as slowing growth and geopolitical risks already weighed on the asset class and could help explain why early August volatility have been more muted relative to the moves in equity volatility or the carry funders in JPY. As risk sentiment has recovered from the initial low’s seen on 5 August, once again the LatAm high-beta, high-carry currencies have appreciated most sharply, but equally EM Asia low-yielding currencies have held onto their earlier gains.

Week in review

The Saudi Ministry of Investment (MISA) announced various updates to the Kingdom’s investment law to be implemented in early 2025, aimed to enhance the business environment for foreign investors. Inflation in Czech Republic edged higher from 2.0% y/y in June to 2.2% y/y in July, higher than our forecasts (2.1% y/y) and consensus (2.0% y/y). Inflation in Romania increased from 4.9% y/y in June to 5.4% y/y in July, higher than our forecasts (5.2% y/y) and consensus (5.1% y/y). Finally, headline inflation in Israel ticked up from 2.9% y/y in June to 3.2% y/y in July, in a slight upside surprise to our (2.9% y/y) and consensus (3.1% y/y) forecasts.

Week ahead

This week will be relatively quiet in the EM EMEA region. There will be an MPC meeting in Turkey on 20 August (MUFG and consensus: on hold at 50.00%) and July inflation data for South Africa will be released on 21 August (MUFG and consensus: -0.3ppts to 4.8% y/y). Finally, given the historical lull of central bank communications in August, Jackson Hole is typically the highest profile opportunity to hear from policymakers ahead of the resumption of rate decisions in the fall. The full schedule will be released on 22 August, at 8pm EDT ahead of the start of the conference, but so far, we know that Fed Chair Powell, BoE Governor Bailey, and ECB Board member Philip Lane will be speaking.

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.

Core indicators

The latest monthly IIF flow data signalled that EM securities attracted USD36.5bn in July – a significant increase relative to the prior three month. Notwithstanding heightened volatility owing to geopolitical risks, monetary policy uncertainty and a slow drying up of the carry trade, July witnessed fresh issuance of sovereign and corporate debt (notably in EM Asia), which drove most of the inflows last month.