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Chinese stimulus adds impetus to EM prospects

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@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

 

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

Macro focus

Our constructive view on EMs at the beginning of the year was predicated on three dimensions – (i) an improving global macro mix (non-recessionary rate cuts); (ii) a policy driven recovery in China; and (iii) a rebound in corporate earnings. While underlying earnings have been recovering, the other two components had remained elusive, at least until late July. Chinese economic activity stayed weak and was met by a piecemeal and underwhelming response by policymakers. At the same time, the global macro environment was less favourable for EMs, amid bouts of rising US rates, US dollar strength and investor concerns around US growth that drove significant volatility during the summer. Coming out of the summer, the macro cycle improved as the Fed signalled rate cuts and eventually delivered a large 50bp cut, easing any hard landing concerns. Moreover, in the last week of September, Chinese policymakers announced significant easing measures spanning monetary policy, policies to support the equity and property markets. Adding further Chinese impetus, the Ministry of Finance confirmed broad elements of a fiscal package on 12 October (although the total size and details are still unclear). Taken together, China’s seriousness in addressing its ailing economy signals that policymakers have made a turn on cyclical policy management and increased their focus on the economy. This add breadth to EM prospects, to what has been a hitherto narrower EM ex-China focused investor positioning across the complex.

FX views

Emerging market currencies have on the whole continued to correct lower against the USD over the past week. On top of the domestic policy concerns, the BRL has been undermined alongside other commodity-related emerging market currencies and Asian currencies by some initial disappointment over China’s fiscal policy plans. The USD has continued to strengthen even as US yields have lost some upward momentum over the past week especially at the short-end of the curve. Rising probability of Trump election win continues to pose downside risks for Asia & China related EM FX.

Week in review

The UAE cabinet approved a 2025 budget with expenditures rising ~12% to USD19.5bn next year. Meanwhile, the emirate of Sharjah tapped the international debt market once again with a USD750m 10.5 years Sukuk. Inflations for September were released in Hungary (dropped from 3.4% y/y to 3.0% y/y), Czech Republic (went up from 2.2% y/y to 2.6% y/y), Egypt (increased from 26.2% y/y to 26.4% y/y), Romania (declined from 5.1% y/y to 4.6% y/y) and Russia (fell from 9.1% y/y to 8.6% y/y). Lastly, The Bank of Israel (BoI) kept its policy rate unchanged at 4.50% in line with our (and consensus) expectations amid inflation surge and lower growth forecasts.

Week ahead

In the week ahead, there will be a rate meetings in Egypt (MUFG and consensus: on hold at 27.25%) and Turkey (MUFG and consensus: on hold at 50.00%). We will get September CPI data in Israel (MUFG and consensus: up 0.1ppt to 3.7% y/y). Elsewhere, global markets will await a concrete figure from China’s fiscal stimulus, with specifics potentially come either at the upcoming State Council executive meeting or the NPC standing committee meeting (the latter of which is when budgetary approvals can be finalised).

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 for the remainder of 2024.

Core indicators

The latest monthly IIF flow data signalled that EM securities attracted USD56.6bn in September 2024 driven by key policy shifts and a more favourable global monetary environment. Geopolitical risks and uncertainty around the US elections remain concerns that could affect investor sentiment. We reiterate that the relationship between EM currencies and Fed decisions are crucial – higher rates normally strengthens the US dollar, diminishing the appeal of EM currencies, which can lead to capital outflows and increased borrowing costs for EM.