With Q2 well underway, one cannot but look back at the first quarter of 2016, and to describe it as tumultuous would be anything short of an understatement.
From the large swings witnessed in capital markets to supportive Central Bank stances, a turnaround in EM fortunes, as well as political instability in some regions coupled with the recent terrorist attacks and immigration crisis hitting the MENA region and Southern Europe, Q1 will definitely not be forgotten any time soon.
One of the key takeaways will clearly be the direction EM has taken over recent weeks.
Since the start of the year, emerging markets have had their fair share of negative market-related news, from disappointing economic data to an ever strong dollar; emerging markets bore the brunt of the major part of a marked decline in global economic activity.
Though the sharp decline in a select few commodities (such as oil and steel) could have been interpreted as beneficial for emerging markets (resulting in lower input costs), it is no secret that a large part of the livelihood of EM depend on profitability from commodities most notably grains. With the global economy waning and the US dollar strengthening, demand for EM subsided.
However, EM saw a sharp turnaround (on the upside) during the month of March, mainly on the back of accommodative stances by the ECB and Chinese Central Bank but most importantly a more dovish than expected US Federal Reserve, the result of which was a significant decline of the dollar against many emerging market currencies.
With the large majority of EM sovereigns and corporates having debt denominated in US dollar means that the cost to re-finance and service such debt became cheaper as did the cost to raise such debt in capital markets.
This has spurred on demand within EM and we are sure to see significant improvements in economic data over the coming weeks, highlighting recent market activity. In fact, Chinese economic indicators are already pointing towards a shift, albeit slight, in investor sentiment in the region. Yesterday’s CPIs were in line however with expectations at 2.3 per cent y-o-y.
Furthermore, the release of the most recent set of FOMC minutes last week added further impetus to a weakening dollar and an increase in demand for EM assets as they indicated the fact that despite showing marked signs of improvement, the US economy is still susceptible to external shocks and a slowdown in global growth could impinge output in the US. In fact, GDP forecasts were revised lower and FOMC opined that interest rate hikes might not be as forthcoming as the markets had been envisaging, spurring demand for EM assets.
Having said that, we are aware of the run EM credit has had so far year-to-date, with the BAML Emerging Markets Corporates Plus Index registering a 4.53% increase so far, clearly one of the best performing assets to date. It can be argued that this rally has got enough legs to take it further, but with markets remaining ever so fragile it would be recommendable to treat this asset class with caution in the short term.
Disclaimer: This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.