In today’s briefing:
- China: EM Investors Precariously Positioned
- EM Positioning After Russia’s Collapse
- Indonesian Rupiah Shines in Volatile Times
- UK: Labour Market on a Tight Track
China: EM Investors Precariously Positioned
- Average holding weights in China & HK have fallen to their lowest levels since late 2019. From a peak of 38.26% in October 2020, exposure has dropped to 29.01%
- China underweights have contracted due to a combination of Russian overweights being displaced, and on the back of significant falls in the price of key index holdings.
- China is still the largest holding in EM by a margin, but was costly to EM managers over the last year. Active managers may be tempted to reduce allocations.
EM Positioning After Russia’s Collapse
- Russian overweight wiped out after initial phase of Russia drop. China underweight contracts on the back of natural portfolio adjustments.
- South Africa takes on new role as the top pure EM play in the region. Saudi Arabia underweight increases.
- Russian overweight causes underperformance of -0.64% for active managers compared to benchmark. Saudi Arabia u/w is proving a costly position for active managers in the face of inflated oil prices.
Indonesian Rupiah Shines in Volatile Times
- The Indonesian rupiah has outperformed most EM currencies, particularly other Asian currencies, and has done so with low volatility in contrast with the rising volatility of the EM FX index.
- Looking ahead, headwinds may be appearing with the interest-rate differential working against the currency as the Fed starts raising rates and higher inflation leading to lower real rates.
- While the rise in commodity prices is generating trade surpluses for now, the current account may turn negative from positive with a rise in imports accompanying the economy’s reopening.
UK: Labour Market on a Tight Track
- The UK unemployment rate fell by 11bps to 3.9% as the labour force shrunk enough to offset stagnant employment levels. Gaps are more critical to monetary policymakers.
- Unemployment is closing in on the BoE’s 3.8% forecast for Q1, historically consistent with the Bank rate at 0.75%, supporting another 25bps hike in March.
- Wage settlements are responding to the tight market and inflation driving real terms declines. That should encourage additional rate hikes this year.
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