MUFG: Reasons to remain constructive on the EM story in H2 2021

MUFG: Reasons to remain constructive on the EM story in H2 2021

Emerging Markets
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The hawkish surprise from the US Federal Reserve meeting last week risks derailing the decent EM asset performance witnessed throughout the second quarter which have been supported by the drop in US Treasury yields, a softer US dollar and broad optimism surrounding the vaccine-led global economic recovery.

As markets digest the 'DOTs tantrum' on EMs, we offer reasons to not go overboard on the development and to remain constructive on the EM story in H2 2021.

FX views
It has been a bad week for EM FX after the Fed’s hawkish policy shift triggered a heavy sell off, led by CLP (-4.0%), ZAR (-3.9%) and COP (-3.8%), relative to USD – attention now turns to rhetoric from Fed officials including Fed Chair Powell this week to gauge EM FX direction.

Week in review
Over the previous week, Turkey (19%), Egypt (8.25%) and Ukraine (7.5%) all kept rates unchanged, whilst Saudi Q1 GDP data confirmed last month’s flash reading with a robust pickup in non-oil activity (3.7% y/y), the growth of which is central to the country’s efforts in realising Vision 2030.

Week ahead and calendar
In the week ahead, we will have rate decisions in Czech Republic (25bp to 0.50%), Hungary (30bp to 0.90%) and South Africa inflation for May (5.2% y/y).

Forecasts at a glance
We remain resolutely bullish on the EM EMEA region, albeit with considerable heterogeneity. We provide our real GDP, fiscal and current account balance, inflation, rates and FX forecasts for this year and 2022.

Core indicators
The hawkish Fed pivot led to EM capital outflows last week (USD-1.4bn w/w), driven by equity outflows (USD-1.5bn w/w), which offset marginal debt inflows (USD0.1bn w/w).