FX Emerging Markets
Chinese GDP growth in Q1 (7.7% YoY) was marginally lower than expected and more recent data, including industrial production and the PMI
surveys, have also
been on the disappointing side. The new political guide seems to be serious in trying for real to rebalance the economy from export/investment to driven by domestic demand before it is too late. And this likely means accepting lower growth and more suffering in the financial and banking system compared to the past.
India’s economic performance has been subdued. GDP growth was again below trend in Q1 at 4.8% YoY, industrial production grew by just 2.0% YoY in April, and the May PMI survey measure declined to a barely expansionary 50.1.
Growth in Brazil has also fallen well short of expectations so far this year. GDP grew by 0.6% QoQ, mainly reflecting weak household consumption and a large negative
contribution from net exports. Weak
growth, rising inflation,
and a widening current account deficit, had all suggested that Brazil had reached the limits of its consumption-oriented growth model.
The Russian government is
contemplating how to stimulate its flagging economy, which has been growing at an annualized rate of 1.3% for the last two quarters. Few concrete measures have so far been agreed. This is undoubtedly disappointing as far as the structural reform agenda goes, which holds the key to greater
foreign investment higher growth.
As a consequence sell-side research has been lowering their economic forecast for EM growth. Chart 1 shows Deutsche Bank case.
Positioning and cumulative inflows are not trivial
As can be seen from Chart 2, and
Chart 3: EM Fixed Income size ($ bln) Source: J. P. Morgan
courtesy again of Deutsche
Bank, after the Great Financial Crisis, with developed economies desperate to keep interest rates at their lowest levels in history, the Emerging Markets financial markets benefitted big time from money searching for a decent yield.
Inflows have been significant especially in Local Currency debt markets which obviously involves exposure to EMFX, as can be seen in JP Morgan Chart 3.
Aggregate capital flows to Chart 2: Cumulative net inflows into mutual funds 12 FX TRADER MAGAZINE July - September 2013 Source: ICI, Deutsche Bank Research
emerging markets have accelerated in the last year or so. Even if they are still well below the levels seen in 2010 there has, however, been a shift in the composition of flows towards portfolio investments, especially in bond markets, where foreign participation hit record levels in some cases earlier this year. Recent movements in exchange rates seem to reflect this, weakening most in countries that have received significant shorter-term inflows over the last year. Fundamentals seem to have mattered less.
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