MUFG: EM interest rate hikes and asset price implications

MUFG: EM interest rate hikes and asset price implications

Inflatie Rente
Inflatie (05) rente

As inflation expectations rise across the world, investors turn apprehensive that a reversal in broad monetary support may pressure risk assets.

From an emerging markets perspective, history tells us that common hiking cycles normally lead to mixed asset performance, namely negative equity as well as credit returns, above average FX performance and varied economic growth rates. We draw on the lessons learnt of asset performance stemming from EM rate hikes to gauge direction as to what may be in store for H2 2021

FX views
EM FX carry trades are performing well recently in contrast in G10 FX carry trades as market participants increasingly have to seek out higher yields on offer in the EM complex and absent a material hawkish policy surprise by the Fed this week, the stage appears set for high yielding EM FX to continue to outperform

Trading views
EM central banks are not all singing from the same hymn sheet which whilst is not constructive for our positioning, we maintain conviction that relative value trades will likely have as much alphas as a general USD EM view, especially as we await clearer signals from the Fed on tightening

Week in review
Over the previous week, Russia raised rates by 50bp with hawkish forward guidance, Poland maintained rates and maintained that the inflation overshoot is transitory, Dubai’s PMI for May that edged back but remained in expansionary territory, whilst a host of EM inflation readings for May printed higher

Week ahead and calendar
In the week ahead, we have rate decisions in Turkey (on hold), Egypt (on hold) and Ukraine (50bp hike to 8.0%) as well as inflation readings for Saudi Arabia (higher) and Israel (higher)

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
EM capital flows gained further momentum rising for the third consecutive week (USD2.8bn w/w), with both higher equity inflows (USD1.7bn w/w) and debt inflows (USD1.1bn w/w)