Off the beaten track in Asia: Mongolia
Following a turbulent August, markets were generally steadier in September. Local currency sovereign bonds benefited from a slightly weaker US dollar (the JP Morgan GBI-EM Global Diversified Index rose by 0.96%). The corporate credit market rose (the JP Morgan CEMBI Board Diversified Index finished up 0.63%) but the hard currency sovereign bond market retraced some of August’s gains as the rise in US Treasury yields weighed on bond prices (the JP Morgan EMBI fell by 0.46%).
Trade tensions abated somewhat in September, with US/China talks continuing behind the scenes. China agreed to up its imports of US agricultural products while the US agreed to delay its next round of tariff increases by two weeks, ahead of China’s 70th National Day celebrations.
Other geo-political news stole the headlines in September, not least the attack on a major oil facility in Saudi Arabia. This resulted in oil prices spiking, but as supply concerns eased the focus shifted to weaker global growth potentially dampening demand for the commodity. The resultant fall in oil prices benefited oil importers such as India.
While the calmer trade backdrop supported some Asian currencies, the manufacturing slowdown in the euro zone weighed on currencies in neighbouring central and eastern Europe, particularly the Hungarian forint.
Weakness in manufacturing data is now a global phenomenon that is keeping many central banks in dovish mode, with Brazil seeing its interest rates cut to historic lows.
Turkey was a top performing market as a relatively restrained cut in interest rates assuaged many investors’ concerns over central bank credibility. However, we think many question marks remain over monetary and fiscal policy in the country.
One market where the central bank’s credibility is unlikely to be questioned is Russia. There we saw another sensible interest rate cut and expect soft inflation data to allow for more of the same. This creates a positive outlook for the country’s bond market, since bond prices rise as interest rates fall.
Zambia was among the high-yield bond markets that benefited from investors’ improved sentiment and risk appetite. The country’s assets also strengthened on signs that the finance minister will proactively engage with the IMF to turn around the economy.
Last but by no means least, Argentinian assets made a recovery in September as the market welcomed the government’s plans to shore up currency reserves and investors took comfort in talk that debt might be reprofiled (rather than face a principal haircut) under the expected new political regime.
Top down views and outlook
We maintain our cautious view for the asset class in the near term and we remain close to neutral in our overall risk exposure, preferring to focus on active bottom-up relative value positions.
Central banks across the globe are entering a monetary policy easing cycle, reflected in a fall in core interest rates. This is supporting investors’ hunt for yield and highlighting the relative attractiveness of emerging market debt.
Of course, the move in core rates is a reaction to the slowdown in global growth. The outlook for the global economy remains soft, with data prints continuing to weaken, albeit no longer surprising to the downside. The consumer sector remains a bright spot, but this will start to come under pressure unless we see an improvement in business confidence and a pick-up in investment plans. The outlook for both will be determined in large part by the trajectory of the US-China trade dispute, with a possible ‘hard Brexit’ providing a secondary risk to the European, if not global, economy.
We would also stress that while we still see relatively healthy fundamentals in emerging market economies, with US growth indicators outperforming the rest of the world it is a mixed environment for the asset class performance over the short term.
Given the importance of the emerging (vs. developed) market growth differential for emerging market currency (EMFX) performance, the sluggish growth outlook and Trump-related risks keep us slightly underweight EMFX for now. This is despite the significant value we believe emerging market currencies offer on a long-term, structural basis. We offset this positioning with an overweight stance in hard currency bonds. There we still see some value given improving credit fundamentals overall, particularly in non-oil exporting, high-yield reform stories. We are neutrally positioned in local currency bonds where the risks seem quite balanced: local-yield valuations look quite stretched, although the soft growth and inflation environment provides ample scope for further easing by emerging market central banks
As always, please keep an eye on our Emerging Perspectives page for forthcoming insights. You can sign up to receive alerts here.
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All rights reserved. Issued by Investec Asset Management, October 2019.