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The Macro Brief - How to price emerging markets
181 Plays1 year ago
Murat Ulgen, Global Head of Emerging Markets Research, examines whether investors are right to be upbeat on the prospects for EM risk assets.
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Transcript
Introduction and Podcast Promotion
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This podcast was recorded for publication on the 25th of July, 2024 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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And don't forget that you can follow us wherever you get your podcasts.
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Just search for The Macro Brief.
Emerging Markets Overview
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Hello, I'm P.S.
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Butler and welcome to the Macrobrief.
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Emerging market assets have had a lot to contend with over the past couple of months.
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Rising market volatility and fiscal worries, plus elections in India, South Africa and Mexico have all brought challenges.
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On the other hand, easier global financial conditions and broadly resilient economic activity have supported risk appetite.
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So as we head into the second half of the year, are investors right to be bullish?
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Let's get the views of Murat Ogun, Global Head of Emerging Markets Research.
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Murat has just published his latest quarterly outlook, The GEMS Investor, as well as the latest edition of our EM Sentiment Survey.
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Murat, welcome to the podcast.
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Thank you very much.
Investor Sentiment and Risks Discussion
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So Murat, looking at the results of your survey of EM investors, broadly speaking, the message is that they're still bullish.
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Although I note that there's a big bulk of them that are undecided.
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Does that pick up on this Goldilocks mix that you talk about in your GEMS Investor?
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This combination of resilient activity and benign inflation, is that what's influencing sentiment?
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And from your perspective, how long can that last?
00:01:25
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Thanks, Piers.
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It's a good question.
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And in a way, we also start our quarterly by posing a question.
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Are we sort of back to square one to the start of the year when markets were pricing in nearly seven times 25 basis points of rate cuts from the Fed?
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over the course of the next 12 months.
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And it kind of a Goldilocks backdrop that you can feel when investors are talking about broader resilient global activity and benign inflation.
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And now we're here.
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It has been almost a roller coaster year pricing in deep rate cuts, pricing them out.
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But now we're pricing in deep rate cuts again.
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So you might argue there is an expectation that a deep cutting cycle by the Fed will help the sentiment.
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The benign inflation kind of provides room for that.
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And as you said, it also shows up in the latest EM sentiment survey where, yes, there is a big neutral camp.
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Although when you look at the net sentiment, which we define as the net of bullish versus bearish views on EM over the following three months, a quarter, actually the net sentiment rose to the second highest in survey's history.
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So yes, indeed, there is a feeling of a Goldilocks backdrop.
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The activity is resilient, broadly speaking, globally, and inflation is benign, keeping the expectation of rate cuts alive.
Geopolitical and Economic Challenges
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And now we're here, almost back to the beginning of the year, where substantial rate cuts are once again priced in.
00:02:47
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Now we talked to you about this previously in the podcast, this idea about what is known and what is discounted in the markets.
00:02:55
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Is that what you're thinking about when you say that there is a low bar for disappointment?
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We actually see risks on both growth and inflation.
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We think the growth inflation expectations in the markets are just too optimistic.
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I mean, starting with growth, you know, first of all, obviously, we have a lot of geopolitics and election related matters that are causing some uncertainty.
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But at the same time, we are looking for a much more modest easing cycle from the Fed.
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This could actually squeeze financial conditions for EM.
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And as a matter of fact, our own measure of financial conditions index, it has actually tightened lately for the first time since the first growth of 2023.
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And together with all these sort of escalating trade protectionism and noise associated with it, this might prove to be a drag on EM activity at a time when you're seeing all these upward revisions by consensus to EM growth forecast.
00:03:48
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And then on inflation, we actually think it's just too early to proclaim or have the victory lap on inflation.
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I mean, as a starter, we got non-tradable service inflation still sticky.
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Supply chain pressures are bubbling.
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Commodity prices are not disinflation anymore.
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And EM corporates have to cope with other cost pressures like rising financial expenditures.
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We are seeing many emerging market economies reversing prices.
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previous subsidies on the fiscal side and admin price caps.
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These are causing some cost spike.
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So no wonder that when you look at the manufacturing PMIs across EM, the input price are at two year high, which could actually eventually cause more cautious monetary policy approach.
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So yes, we think the bar to disappointment is quite low.
00:04:34
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We think there could be some bumps on the road ahead.
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And these are related to the expectations in the market of a relatively favorable growth and inflation mix, and disappointment could be on either side.
00:04:45
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Also, I was interested to see in the survey that fiscal deterioration was not seen as a risk.
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Given what you've just said, is that something we should be more worried about?
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And how does that influence how you would advise investors position themselves between now and the end of the year?
Fiscal Strategy and China's Influence
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You're right.
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It's not the top risk that is being picked up in the survey, but it definitely is rising in prominence over the quarters.
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We are seeing that this is moving up.
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Our global economists have written extensively about this, and we agree with them that the fiscal worries we have at the moment, they're really difficult to overcome without austerity, without reform and or productivity growth.
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And that's why actually
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When we sort of bring everything together to EM strategy, we are adding another layer to our selective approach.
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We were already selective in EM, already looking a lot more bottom up.
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But now we're looking for policy credibility.
00:05:38
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It's actually both monetary and fiscal, but we're including fiscal in there.
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We're looking at emerging market economies who are actually consolidating public finances,
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who are reducing their borrowing needs.
00:05:48
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So, absolutely, peers.
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Fiscal is really important globally for the developed world, but for emerging markets as well.
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Talking about government policy, we've just had China's third plenum, the meeting of top policymakers.
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Do you get a sense that that's going to influence sentiment?
00:06:03
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I mean, obviously, after the plenum, we had monetary easing by the Chinese Center Bank, and our economists are looking for further easing.
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This could be supported by fiscal measures or liquidity if needed to actually, you know, make sure that the growth forecasts or targets are met at the end of the year.
00:06:21
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I think, you know, based on our forecast,
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there is still a good probability that China will manage to meet its growth forecast.
00:06:29
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You know, we got 4.9%.
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That's actually sort of, you know, in line with a broad forecast of around 5% growth this year.
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And when it comes to emerging markets,
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As you have mentioned, Piers, in the survey, now investors actually see China rebounding more strongly as an upside risk for emerging markets.
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In the past, it used to be more about developed world interest rates, but now they're actually pointing to potential China upside that could lift up EM.
00:06:57
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And then we actually give sort of, you know, further details on that, like ask sort of a few extra questions like, okay,
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In that case, which sectors would benefit most?
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And the survey responses, they actually point to potential upside for base metals, for energy commodities, and then to a lesser extent, consumer and capital goods and tourism-related sectors.
00:07:19
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So yes, this is being picked up more.
00:07:21
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We've seen more policy response and more might be forthcoming.
00:07:24
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So in terms of positioning, can you recap on what you would broadly advocate?
00:07:28
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And within that, LATAM, which again looks like a favorite in the emerging market sentiment survey, do you agree with that positioning or is that a bit long in a tooth?
00:07:38
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Sure, sure.
00:07:39
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Well, I think first and foremost, in this EM quarterly GEMS investor, we are really narrowing down our focus even further.
00:07:47
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We were selective but becoming even more selective.
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In a way, the way we frame it, we want to take out some insurance.
00:07:53
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against what could be a volatile end to the year.
00:07:57
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All these geopolitical political issues and quite favorable expectations of growth and inflation globally.
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As mentioned, you know, we do see some risks on either side.
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So yes, we want to narrow our focus further down.
00:08:10
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We're adding another layer on our selective approach.
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We call this the policy credibility.
00:08:15
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We think the hurdle rate to invest in emerging markets is high.
Regional Investment Focus Shift
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We think the global funding is rather scarce.
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So emerging markets really have to offer a compelling story and a credible macro policy mix, or at least the promise of it, to compete for international capital.
00:08:31
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That's why we think one has to focus on bottom up stories.
00:08:34
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Now, you mentioned about LATAM.
00:08:35
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It is true.
00:08:36
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It is a favorite region in the EM sentiment surveys all along this year.
00:08:41
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But in every quarter, we are seeing that investors are actually trimming their bullishness.
00:08:46
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And what we have seen recently, maybe only partly captured by the sentiment survey, there is a bit of a shift towards the EMEA region, Africa, Central Eastern Europe.
00:08:55
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And actually,
00:08:56
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we are also aligned with that view with the quarter we published very recently.
00:09:01
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We think there are more and more examples of credible policy mix within the EMEA region.
00:09:07
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And the way we define it in the quarterly is we're looking for fiscal consolidation and we're looking also some real risk premium from monetary policy front that would reduce the funding needs in an environment where we think there will be competition for capital,
00:09:21
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and emerging markets have to offer a compelling story and also a sizable real risk premium.
00:09:27
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And more examples in the EMEA region, the survey kind of shows in that direction.
00:09:32
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Even though LATAM is favoured, the bullishness surrounding the region is actually getting less and less over the surveys this year.
00:09:39
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Marend, thanks very much for talking to us.
00:09:41
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Thanks very much, Piers.
00:09:47
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The HSBC Global Research App opens a world of insight and investment ideas whenever and wherever you want.
00:09:55
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The app showcases the latest views from our award-winning team of economists, strategists and analysts.
China's Economic Policies and Global Markets
00:10:03
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A powerful search function lets you dive into our full research catalogue covering economics, FX, fixed income and equities, as well as data science, ESG,
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00:10:26
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Here are a few other highlights before we finish.
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As we mentioned earlier, China's top policymakers came together last week to set the reform and economic policy direction for the coming years.
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The third plenum, as it's known, covered areas such as fiscal reforms, the property sector, urban rural development, and the green economy.
00:10:46
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For more details on what was discussed, check out our sister podcast, Under the Banyan Tree, where our chief economist for Greater China, Jing Liu, gives her take on the summit.
00:10:56
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Global equity markets have been on a tear this year, up 13%.
00:11:00
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So is there more to come, or are we nearing the end of the rally?
00:11:04
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In his latest report, Alistair Pinder, global equity strategist, looks at the five key factors that we think could impact stock market performance in the second half of the year.
00:11:14
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And finally, trade economist Shanela Rajanagam sees a perfect storm brewing for global trade.
00:11:20
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Using data on Red Sea incidents, container freight rates, and port congestion, Shanela explores some of the challenges facing global trade in her latest monthly update.
Conclusion and Next Steps
00:11:31
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If you'd like more details on any of those reports, or the EM outlook that we discussed with Murat, please email askresearch at hsbc.com.
00:11:40
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And don't forget that if you're a client of HHPC Global Research, you can download our mobile app.
00:11:49
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So that wraps up things for today.
00:11:51
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From all of us here, thanks for listening.
00:11:53
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We'll be back again next week.