Emerging Market Economist, Emerginomics

Tatiana Orlova

Emerging Market Economist

Emerginomics

Macroeconomics

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<p>Earlier this month, the news that the US and China were nearing a limited trade deal returned optimism to the markets. At the annual IMF and World Bank meetings, hopes that the global economy was likely to avoid recession in 2020 were still running high. However, data on global manufacturing and investment remain gloomy. Turkey’s military operation in response to US President Trump’s decision to pull US troops from Syria roiled Turkey’s markets. Despite the removal of the US sanctions after Turkey and Russia reached an accord in Sochi, we think higher geopolitical risks should remain embedded in Turkish yields. All eyes now should be on the Trump-Xi meeting and the US decision on tariffs on EU auto imports due in November.</p>
<p>This week, the US Fed is holding a regular meeting; the markets are widely expecting another 25bp cut in the Fed funds rate. An insufficiently hawkish Fed statement or an unexpected decision to keep the policy on hold could dilute the markets' optimism and provoke a sell-off in high-yielding assets. Furthermore, they would likely draw more criticism from Trump and stoke up concerns that the Fed has become a hostage in the US-China trade confrontation.</p>
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Earlier this month, the news that the US and China were nearing a limited trade deal returned optimism to the markets. At the annual IMF and World Bank meetings, hopes that the global economy was likely to avoid recession in 2020 were still running high. However, data on global manufacturing and investment remain gloomy. Turkey’s military operation in response to US President Trump’s decision to pull US troops from Syria roiled Turkey’s markets. Despite the removal of the US sanctions after Turkey and Russia reached an accord in Sochi, we think higher geopolitical risks should remain embedded in Turkish yields. All eyes now should be on the Trump-Xi meeting and the US decision on tariffs on EU auto imports due in November.
This week, the US Fed is holding a regular meeting; the markets are widely expecting another 25bp cut in the Fed funds rate. An insufficiently hawkish Fed statement or an unexpected decision to keep the policy on hold could dilute the markets' optimism and provoke a sell-off in high-yielding assets. Furthermore, they would likely draw more criticism from Trump and stoke up concerns that the Fed has become a hostage in the US-China trade confrontation.


Geopolitical Comment: While Markets Are Hoping for US-China Mini-Deal, Turkey Is Playing with Fire

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<p>On 5 August, the Chinese currency finally broke the psychological threshold of 7 vs. USD. Later on the same day, the US State Department designated China as a currency manipulator. Judging from the reaction of some EM central banks, they fear that the currency war has now begun in earnest.</p>
<p>Amidst the signs of a global economic slowdown, EM central banks are busy reviewing their monetary stance. In the economies where growth had been lacklustre for individual reasons, the scope for easing has expanded. In others, unexpected cuts are becoming more likely as no one wants to end up with a currency that is too strong.</p>
<p>Earlier this week, the worse-than-expected results of local elections in Argentina provoked a sell-off in EM assets. In this environment, EM banks need to weigh the pros and cons of each move with extra care. The global climate of risk averseness should serve as a constraint against excessive easing that could lead to runs on local currencies.</p>
</div>


On 5 August, the Chinese currency finally broke the psychological threshold of 7 vs. USD. Later on the same day, the US State Department designated China as a currency manipulator. Judging from the reaction of some EM central banks, they fear that the currency war has now begun in earnest.
Amidst the signs of a global economic slowdown, EM central banks are busy reviewing their monetary stance. In the economies where growth had been lacklustre for individual reasons, the scope for easing has expanded. In others, unexpected cuts are becoming more likely as no one wants to end up with a currency that is too strong.
Earlier this week, the worse-than-expected results of local elections in Argentina provoked a sell-off in EM assets. In this environment, EM banks need to weigh the pros and cons of each move with extra care. The global climate of risk averseness should serve as a constraint against excessive easing that could lead to runs on local currencies.


Fears of US-China Currency War and Flagging Global Growth Fuel Monetary Easing in EM

Multi-asset Macro/Emerging Markets Strategist

Virgil Fernandez Esguerra

Thematic (Sector/Industry)

<p>Global growth is expected to slow over the coming quarters, possibly years - and emerging market economies are certainly not immune from this. Nevertheless, within this diverse universe, the pace of deceleration will be uneven. Whilst some "open" EM economies are generally synchronized with growth dynamics in the rest of the world, others will be shielded by a combination of idiosyncratic forces - including renewed accommodative (monetary and fiscal) policies, cyclical recovery or upswing in domestic growth drivers and - for some - positive political developments and reform progress. Still, other EMs are less fortunate and a growth deceleration is likely to deepen in the near-term - held back by less policy flexibility, political uncertainty and various domestic or external shocks.</p><p>With 4Q18 GDP growth reports underway, we sifted through - and synthesized - various growth indicators to introduce a <strong>"Growth-Profile Framework" (GPF)</strong> to systematically evaluate - and rank - growth profiles in a data-driven, automated and standardized manner. The "GPF" not only takes into account GDP for the most recently-reported four quarters but also forward-looking forecasts and the latest economist revisions, which often take into account the latest data surprises and other material developments.</p><p>The observation universe is the <strong>"Emerging Markets-25" (EM-25)</strong> of large, investable EM countries most often found in benchmark indices such as MSCI EM and JPMorgan (GBI-EM and EMBI) indices. This opportunity set offers a breadth of diversity spanning across Asia, EMEA and LatAm and different stages of development. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/483/original/Slide1.JPG?1551338422" class="editor-image img-responsive" data-smartkarma-image-id="80483"></figure><div class="content-caption">Source: Author's assessment based on Growth Profile Framework (GPF)</div><p>Highlights: </p><ul>
<li>
<strong>Introducing the "EM-25" Growth Profile Framework</strong>: This data-driven, automated and standardized model generates a ranking of the "EM-25" economies based on a composite of factors reflecting: 1/ The most recent GDP growth data (in relation to three look-back periods), 2/ Forward-looking consensus growth forecasts (in relation to the most recent four quarters of GDP) and 3/ Upgrades and downgrades to those forecasts.</li>
<li>
<strong>Andean condors soar while Asian elephants amble along</strong>: LatAm - specifically the Andean economies (plus Brazil) - currently stand out as having the most attractive growth profiles among the EM-25. They are helped by a combination of - largely idiosyncratic - factors ranging from newfound reform optimism (Brazil), improving domestic confidence (Colombia), pent-up domestic demand (Peru) and stabilizing appetite for key commodities (Chile). This contrasts with export-oriented Asian manufacturers that dominate the bottom rankings. Elsewhere, the legacy of past macroeconomic policy choices - both painfully orthodox (Argentina) and otherwise (Turkey, Venezuela, Pakistan) - are taking their unique toll on certain other economies.</li>
<li>
<strong>Does growth matter for investment strategy? Yes...</strong>: Simplistically speaking, economies with exemplary growth profiles are viable candidates for long or overweight positions in equity markets and external debt. Strong growth is often associated with stronger corporate earnings potential as well as lower debt-to-GDP levels, respectively. Growth implications for FX and local debt are more ambiguous, but to the extent that a robust growth outlook guides central banks to tighten policy or lifts the government's fiscal revenues over time, then this may also be positive for currencies and rates, respectively.</li>
<li><p><strong>...But it's complicated</strong>: However, strong growth can detract asset performance if it is the result of unsustainable policies (e.g. overly loose fiscal or monetary actions) or if it leads to overheating conditions (e.g. runaway inflation or a wider current account deficit). An attractive growth profile, as with all data sets, needs to be judged against its context. Although high and improving growth is an end-goal for many policymakers, the road to strong - and sustainable - growth is far more important for its longevity (and for risk assets over the medium-term). For instance: Are growth prospects improving due to rising productivity (as it might from structural reform)? Or rather from overly-stimulative policies that risk fanning inflation or widening the current account deficit? To what extent do officials have the policy flexibility to stoke growth, smoothen downside growth risks or stave off a recession? We touch upon these questions in the individual country sections below.</p></li>
<li><p>While the narrative is almost always more important than the number itself, this GPF framework nevertheless offers a valuable screening tool that systematically evaluates growth profiles - on a stand-alone and relative basis - across the "EM-25" universe.</p></li>
</ul><div class="content-highlight"><p><strong>Growth Profile Framework (GPF) Rankings</strong>: Snapshot and Historical Movement</p></div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/484/original/Slide2.JPG?1551338500" class="editor-image img-responsive" data-smartkarma-image-id="80484"></figure><div class="content-caption">Source: Author's Growth Profile Framework (GPF)</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/485/original/Slide3.JPG?1551338518" class="editor-image img-responsive" data-smartkarma-image-id="80485"></figure><div class="content-caption">Source: Author's Growth Profile Framework (GPF)</div>

Global growth is expected to slow over the coming quarters, possibly years - and emerging market economies are certainly not immune from this. Nevertheless, within this diverse universe, the pace of deceleration will be uneven. Whilst some "open" EM economies are generally synchronized with growth dynamics in the rest of the world, others will be shielded by a combination of idiosyncratic forces - including renewed accommodative (monetary and fiscal) policies, cyclical recovery or upswing in domestic growth drivers and - for some - positive political developments and reform progress. Still, other EMs are less fortunate and a growth deceleration is likely to deepen in the near-term - held back by less policy flexibility, political uncertainty and various domestic or external shocks.With 4Q18 GDP growth reports underway, we sifted through - and synthesized - various growth indicators to introduce a "Growth-Profile Framework" (GPF) to systematically evaluate - and rank - growth profiles in a data-driven, automated and standardized manner. The "GPF" not only takes into account GDP for the most recently-reported four quarters but also forward-looking forecasts and the latest economist revisions, which often take into account the latest data surprises and other material developments.The observation universe is the "Emerging Markets-25" (EM-25) of large, investable EM countries most often found in benchmark indices such as MSCI EM and JPMorgan (GBI-EM and EMBI) indices. This opportunity set offers a breadth of diversity spanning across Asia, EMEA and LatAm and different stages of development. Source: Author's assessment based on Growth Profile Framework (GPF)Highlights: 

Introducing the "EM-25" Growth Profile Framework: This data-driven, automated and standardized model generates a ranking of the "EM-25" economies based on a composite of factors reflecting: 1/ The most recent GDP growth data (in relation to three look-back periods), 2/ Forward-looking consensus growth forecasts (in relation to the most recent four quarters of GDP) and 3/ Upgrades and downgrades to those forecasts.

Andean condors soar while Asian elephants amble along: LatAm - specifically the Andean economies (plus Brazil) - currently stand out as having the most attractive growth profiles among the EM-25. They are helped by a combination of - largely idiosyncratic - factors ranging from newfound reform optimism (Brazil), improving domestic confidence (Colombia), pent-up domestic demand (Peru) and stabilizing appetite for key commodities (Chile). This contrasts with export-oriented Asian manufacturers that dominate the bottom rankings. Elsewhere, the legacy of past macroeconomic policy choices - both painfully orthodox (Argentina) and otherwise (Turkey, Venezuela, Pakistan) - are taking their unique toll on certain other economies.

Does growth matter for investment strategy? Yes...: Simplistically speaking, economies with exemplary growth profiles are viable candidates for long or overweight positions in equity markets and external debt. Strong growth is often associated with stronger corporate earnings potential as well as lower debt-to-GDP levels, respectively. Growth implications for FX and local debt are more ambiguous, but to the extent that a robust growth outlook guides central banks to tighten policy or lifts the government's fiscal revenues over time, then this may also be positive for currencies and rates, respectively.
...But it's complicated: However, strong growth can detract asset performance if it is the result of unsustainable policies (e.g. overly loose fiscal or monetary actions) or if it leads to overheating conditions (e.g. runaway inflation or a wider current account deficit). An attractive growth profile, as with all data sets, needs to be judged against its context. Although high and improving growth is an end-goal for many policymakers, the road to strong - and sustainable - growth is far more important for its longevity (and for risk assets over the medium-term). For instance: Are growth prospects improving due to rising productivity (as it might from structural reform)? Or rather from overly-stimulative policies that risk fanning inflation or widening the current account deficit? To what extent do officials have the policy flexibility to stoke growth, smoothen downside growth risks or stave off a recession? We touch upon these questions in the individual country sections below.
While the narrative is almost always more important than the number itself, this GPF framework nevertheless offers a valuable screening tool that systematically evaluates growth profiles - on a stand-alone and relative basis - across the "EM-25" universe.
Growth Profile Framework (GPF) Rankings: Snapshot and Historical MovementSource: Author's Growth Profile Framework (GPF)Source: Author's Growth Profile Framework (GPF)

Global EM Special: Andean Condors Vs Asian Elephants - Where Is the Growth in EM?

Poland

The Polish Zloty dollar is the official currency of Poland

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Geopolitical Comment: While Markets Are Hoping for US-China Mini-Deal, Turkey Is Playing with Fire

Earlier this month, the news that the US and China were nearing a limited trade deal returned optimism to the markets. At the annual IMF and World...

Tatiana Orlova

Fears of US-China Currency War and Flagging Global Growth Fuel Monetary Easing in EM

On 5 August, the Chinese currency finally broke the psychological threshold of 7 vs. USD. Later on the same day, the US State Department...

Tatiana Orlova

Global EM Special: Andean Condors Vs Asian Elephants - Where Is the Growth in EM?

Global growth is expected to slow over the coming quarters, possibly years - and emerging market economies are certainly not immune from this....

Virgil Fernandez Esguerra

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)