Summary
New Russian sanctions and uncertainty about the future weigh on Russian and Ukrainian assets. But it’s life as usual for many other emerging markets, with central banks reacting to higher inflation and markets weighing budget proposals.
Russia/Ukraine conflict
Russian and Ukrainian assets were hit hard this morningas markets absorbed additional Russian sanctions and reports on new developments on the ground. A practical question (from a fixed income (FI) perspective) is whether Russia could be excluded from global bond indices, given the limitations on new issues and secondary market trading. Russia’s weight in the JP Morgan local bond index (GBI-EM Global Diversified) is around 6% and in the JP Morgan sovereign bond index (EMBIG) just under 3%. These are significant amounts. The prospect of India’s inclusion in the local bond index adds an element of suspense as to the ultimate impact on country weightings.
Emerging market inflation, policy rate outlook
As investors wonder if the escalation between Russia and Ukraine will affect developed market (DM) policy normalization plans, central banks in EMEA and LATAM are definitely in the mood for more tightening. Hungary raised its policy rate by 50 basis points yesterday, and consensus calls for a 30 basis point hike in Hungary’s 1-week deposit rate on Thursday. Today Brazil’s Mid-Month Inflation Upside Surprise Confirms Market Expectations (implied by the local swap curve) a further rate hike of 100 basis points in March, followed by 65 basis points of additional tightening in May and 36 additional basis points in June. The market has rewarded Brazil’s proactive monetary policy with a massive outperformance of currencies and local bonds so far this year (see chart below). But we are keeping an eye on the weakening growth outlook (now just 0.6%, according to the Bloomberg consensus), which is quickly becoming collateral damage in the central bank’s heroic fight against inflation.
Fiscal consolidation in South Africa, debt profile
South Africa is another “emerging market (EM) year-to-date star” – and today’s presentation the 2022 budget suggests there could be additional potential here. Although the market was surprised by a slower than expected pace of fiscal consolidation and no changes in emissions, the budget is based on conservative growth assumptions, there is no increase in the wage bill and the project also shows some improvements in South Africa’s debt. profile over time (including a lower leverage peak). Stay tuned!
Charts at a Glance: EM Stars of 2022
Source: Bloomberg LP
Initially published by VanEck on February 23, 2022.
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