Our asset allocation calls were OW Mexico, Colombia, India, Taiwan,
Thailand, the Philippines and Malaysia and UW Brazil, South Africa,
China and Indonesia. The recommendation in Indonesia is a zero weight
as the risk reward between a lower Rupiah against higher equities is so
poor. We are addressing the inconsistency in recommendations in an
environment of balance of payment strains by downgrading India to
neutral and upgrading China to neutral. We acknowledge this is reactive
rather than proactive. If the Rupee continues to slide then India will
continue to underperform.
Currencies are driving equity markets. The Rupee and Rupiah are
leading EM FX lower. Investors are asking who will fund their current
account deficits (India CADest 5.1%/GDP and Indonesia CADest
2.1%/GDP). Markets pricing in tapering since May is a key catalyst. Our
base case is the Fed tapers asset purchases from September. A
continuation in EM bond fund redemptions is a reasonable assumption
thus the strain on EM FX is likely to continue.
Are we too late? We are certainly late in downgrading India. Our OW
case was less fiscal drag and a monetary stimulus leading to a modest
cyclical acceleration in 2H13. The move in the Rupee has overwhelmed
this. Policy options are limited. They have announced reform plus
technical measures to support the currency. These have not worked. The
IMF would typically prescribe higher interest rates to suppress domestic
demand and lower imports in order to address the current account deficit.
This option is politically unpalatable with next year’s general election.
Arguably, more importantly the equity flows are important in funding the
CAD. Higher interest rates and lower growth would likely result in
foreign selling. A possible option is to completely open India's bond
markets. This would have two positive impacts: inflows from passive
funds into Indian bonds and a signal of economic liberalization. If this
stabilizes the Rupee then Indian equities are likely to rally, led by the
banks which are cheap relative to their valuation history.
Will this FX stress expand to other EMs? With Indonesia difficult to
short hedges are migrating to other ASEAN markets, notably Thailand.
The late June to date cyclical rally is losing steam. EM equities are likely
to decline into September. Despite a 3.5% CAD the Colombian Peso is
outperforming other EM currencies. This reflects confidence in its ability
to fund its deficit via FDI. We will publish more details on asset
allocation views in this month’s Key Trades and Risks.
��
Thailand, the Philippines and Malaysia and UW Brazil, South Africa,
China and Indonesia. The recommendation in Indonesia is a zero weight
as the risk reward between a lower Rupiah against higher equities is so
poor. We are addressing the inconsistency in recommendations in an
environment of balance of payment strains by downgrading India to
neutral and upgrading China to neutral. We acknowledge this is reactive
rather than proactive. If the Rupee continues to slide then India will
continue to underperform.
Currencies are driving equity markets. The Rupee and Rupiah are
leading EM FX lower. Investors are asking who will fund their current
account deficits (India CADest 5.1%/GDP and Indonesia CADest
2.1%/GDP). Markets pricing in tapering since May is a key catalyst. Our
base case is the Fed tapers asset purchases from September. A
continuation in EM bond fund redemptions is a reasonable assumption
thus the strain on EM FX is likely to continue.
Are we too late? We are certainly late in downgrading India. Our OW
case was less fiscal drag and a monetary stimulus leading to a modest
cyclical acceleration in 2H13. The move in the Rupee has overwhelmed
this. Policy options are limited. They have announced reform plus
technical measures to support the currency. These have not worked. The
IMF would typically prescribe higher interest rates to suppress domestic
demand and lower imports in order to address the current account deficit.
This option is politically unpalatable with next year’s general election.
Arguably, more importantly the equity flows are important in funding the
CAD. Higher interest rates and lower growth would likely result in
foreign selling. A possible option is to completely open India's bond
markets. This would have two positive impacts: inflows from passive
funds into Indian bonds and a signal of economic liberalization. If this
stabilizes the Rupee then Indian equities are likely to rally, led by the
banks which are cheap relative to their valuation history.
Will this FX stress expand to other EMs? With Indonesia difficult to
short hedges are migrating to other ASEAN markets, notably Thailand.
The late June to date cyclical rally is losing steam. EM equities are likely
to decline into September. Despite a 3.5% CAD the Colombian Peso is
outperforming other EM currencies. This reflects confidence in its ability
to fund its deficit via FDI. We will publish more details on asset
allocation views in this month’s Key Trades and Risks.
No comments:
Post a Comment