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The Macro Brief – EM’s rough ride
26 Plays1 year ago
Murat Ulgen looks at whether there are any signs of respite for emerging market assets with challenges continuing to mount up. Disclaimer: https://www.research.hsbc.com/R/51/nrbS76R Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction to HSBC Global Viewpoint
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening.
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And now onto today's show.
Podcast Recording and Subscription Info
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The following podcast was recorded on the 5th of October 2023 by HSBC Global Research.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
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Remember, you can follow this weekly podcast on Apple and Spotify or wherever you get your podcasts by searching for The Macro Brief.
Emerging Markets Challenges Overview
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Hello, I'm P.S.
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Butler and welcome to the Macrobrief.
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Now, it's not been an easy time for emerging markets over the past few months with higher core bond yields, a stronger dollar and China's slowing recovery just some of the challenges.
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So as we enter the final quarter of 2023, are things looking any brighter?
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Merit Oelgan, Global Head of Emerging Markets Research, is here with me in the studio.
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We're going to be discussing what's next for emerging market assets and also look at what's on investors' minds as we assess the latest results of our proprietary Emerging Markets Sentiment Survey.
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So, Marek, the last time we spoke on the podcast was at the beginning of the summer.
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And if I recall correctly, you were a bit more cautious but still constructive about the outlook.
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But
2023 EM Market Performance and Challenges
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as we say in markets, a week is a long time, let alone a whole summer, and a lot has happened.
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That's correct, Piers.
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Actually, emerging markets had a rather good start for this year.
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In the first half, the performances were pretty decent across asset classes, especially for local markets.
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But then in the middle of the summer, the favorable carry trade environment was abruptly interrupted.
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There were some risks we were highlighting for the autumn season, but admittedly, they materialized earlier than we had expected, like this challenging global rates environment, as you said,
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strong dollar, China helping a lot less to emerging markets compared to the past.
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And also some emerging markets and the banks have started to cut rates rather sharply, which was reducing the carrier yield differential.
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So yes, I think EM risk appetite has taken a setback.
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And this has already happened in the middle of the summer, a bit earlier than we expected.
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So we're fortunate to have the results of the latest Emerging Market Sentiment Survey, which would have been done during this period of change.
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So how
Investor Sentiment Towards Emerging Markets
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has investment sentiment been affected by this?
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Yes, so investors clearly nudge down their enthusiasm and bullishness on EM sentiment, but they still remain broadly constructive, which is quite encouraging.
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What's also interesting is they have pretty high cash levels, and they're inclined to increase cash even further over the next three months going towards the end of the year.
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They also maintain a rather good risk appetite.
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So it's an interesting combination.
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It actually tells us they're not giving up on EM.
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They're not shying away for EM, but they'll probably be a lot more selective going forward.
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One of the things that intrigued me was on inflation, again, from the sentiment survey and what you just published.
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Are investors and indeed emerging market central banks being too complacent about inflation?
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We've had this sort
Core Inflation and Its Impact on EM
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of sharp decline, but the decline appears to be sort of slowing.
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Is it proving to be sticky?
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Is that going to be a negative surprise for the markets?
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Yeah, it has fallen a lot since October last year.
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It's been almost a year where the cost side factors have substantially dragged inflation lower, which is good actually.
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Headline CPI has also come down.
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But core inflation has slowed a lot less.
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So we're in this peculiar environment where
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Headline inflation is low and core inflation is high, which tells you the last bit of this inflation will be a lot more difficult.
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You won't have the favorable Bayes effect.
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And if anything, at the moment, we are seeing headline inflation pressures coming forward in energy prices.
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Food prices have gone up.
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Oil prices have been very volatile, but they're elevated.
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So this last bit of disinflation will be difficult.
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Hence, emerging market center banks cutting rates too fast.
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That will reduce the yield and carry differential, especially when you're in an environment with global rates still by core center banks still remain rather high.
Historical Phases in EM Investment
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If we take a step back in terms of the emerging market asset class, in your report you talk about some of the historical phases that emerging markets have gone through, and you talk about perhaps a new dynamic being at play.
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Can you explain?
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Of course.
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So look, it is very tempting to think that risk sentiment might come back once the global rate cycle peaks, and we're kind of there.
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And some YAM sentiment, as we said, they're already cutting rates.
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But we, on the other hand, we want to take a step back and argue maybe there are new dynamics at play.
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maybe were perhaps entering a new regime in investing in EM.
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So if you go back two decades and look at the early 2000s, when China became part of WTO and emerging markets were added to global supply chains, they received substantial amount of long-term capital in the form of foreign direct investments.
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And there were very strong productivity gains.
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Then fast forward to 2010's post-global financial crisis.
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This time, the baton was passed to portfolio flows.
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It was a very forgiving global monetary policy regime, lots of liquidity, low interest rates.
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But one way or another, emerging markets were receiving capital inflows during those two decades.
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Since the beginning of the pandemic and during its aftermath, now the capital flows are actually quite weak.
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You term
The 'Hangover Decade' for Emerging Markets
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it potentially the hangover decade, which I love the term, but what's the hangover cure?
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Yeah.
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So after these heydays of global growth and liquidity, we are in a much more challenging or perhaps durably challenging environment where you have a lot less favorable growth inflation mix, less support from China, high global rates, low global liquidity and a strong US dollar.
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This is not a great mix.
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That's why we call it a hangover decade.
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And look, I think some economies and markets, they've partied rather responsibly during these heydays of liquidity and growth.
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And some have improved their tolerance levels during the party days.
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I think those will be relatively favored going forward, where investors will probably be a lot more bottom up rather than top down.
The 'Three S's' Framework for EM
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Now you talk about the three S's.
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What do you mean by that?
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Yes, so this is our framework now, this hangover decade.
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I think it will be marked by three S letters, starting of these arguments, one of which is solid fundamentals.
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The second one is structural story.
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And the third one is sizable risk premium.
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I think markets will be judged whether they tick, whether they satisfy at least one, preferably more of these characteristics when we're looking at this hangover decade and more sort of bottom-up approach.
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There's always a danger in emerging markets of becoming too negative.
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Emerging markets can turn around very, very quickly.
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People have now become very realistic about Chinese growth prospects having been much more disappointing than they'd originally expected.
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But could we be blindsided by some fiscal or monetary measures there?
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Is there anything else that you're looking at as a potential upside risk?
Potential Positive Surprises for Emerging Markets
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It is possible.
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I mean, we're expecting these important policy meetings from China towards the end of the year.
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And the data is already stabilizing.
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I mean, the mood is already stabilizing.
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We had some good data beats in August and recently as well.
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If you see further stimulus that is impacting Chinese economy positively and the rest of the world, of course.
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And we already think there are some good stories to tell in emerging markets.
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They tick one of these boxes, actually more than one in certain cases.
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We already prefer Brazil, Mexico.
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We like GCC.
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We like India, Indonesia, relatively speaking, as a macro story.
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I think hard currency debt generally stacks up better in this environment.
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But yes, you may get positive surprises from China, and you may actually end up in an environment where global rates pressure abates, and emerging markets will have a better environment in terms of financial conditions and the growth outlook.
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Murat, thank you very much for joining us today.
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Thanks for having me.
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Murat Elgin there on the prospects for emerging markets.
HSBC Global Investment Seminar Announcement
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Murat will be speaking at our Global Investment Seminar taking place at our London headquarters on the 9th of October.
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The event features presentations from our economists and strategists from across the asset classes.
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So if you're an HSBC client and would like to attend, please contact your HSBC representative to register your attendance.
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Now it's that time of the year where our economists published their outlooks for the final quarter.
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For our
Regional Insights: Asia, Europe, and MEA
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view on the global economy, check out last week's episode of the podcast where we spoke to Janet Henry, our global chief economist.
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But here are some of the highlights from our regional reports.
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Fred Newman, chief Asia economist, says the region faces several looming challenges, ranging from China's wobbly real estate sector to faltering exports and spiking prices for rice.
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some policy makers may need to raise rates further while others aren't quite ready to cut with most reductions in the region set to come over the course of the next year but he sees some bright spots too as healthy domestic demand and renewable energy investment means growth is likely to chug along just below trend here in europe simon wells chief european economist says tightening is hurting but is it working
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after months of rate hikes economic surveys show activity is contracting with the manufacturing sector hit particularly hard and while inflation is coming down it remains to be seen whether more pain may be needed to bring it back to target simon sees eurozone growth stagnating for the rest of the year with a similar story in the uk
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and finally simon williams our chief economist for central and eastern europe the middle east and africa has good news and bad news on the one hand our longer-term forecasts show that regional growth could run above pre pandemic levels in twenty twenty five however there are obstacles that need to be overcome to realize his potential
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Inflation needs to come down.
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Fiscal slippage is adding to debt levels.
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Continued policy discipline will be key.
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If you'd like
Podcast Follow-up and Contact Information
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to know more about any of these economic outlooks or our views on emerging markets that you heard from Murat earlier, please email askresearch at hsbc.com.
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So that's all from us.
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Don't forget to follow the podcast on Apple and Spotify or wherever you get your podcasts by searching for The Macrobrief.
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Thanks very much for listening and we'll be back next week.
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Thank you for joining us at HSBC Global Viewpoint.
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We hope you enjoyed the discussion.
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