MUFG: The rise of risk premium across emerging markets

MUFG: The rise of risk premium across emerging markets

9 november 2021

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Outlook vooruitzicht (09) koers omhoog koersgrafiek

The short-rate shock is intensifying with much attention on the recent ratcheting up of implied policy rates across developed markets.

Emerging markets have been progressively pricing in a higher short-rate risk premium well in advance of this, as we have been consistently cataloguing, with a growing chorus of central banks already tightening policy. We favour emerging markets that have sizable risk premiums and robust macro fundamentals making them less sensitive to volatility in developed markets.

FX views

EM FX have staged a modest rebound following the easing of global financial conditions after major DM central banks (RBA, ECB and BoE) pushed back against market expectations for higher rates – the Fed did not go as far as pushing back against higher rates but neither did it provide any guidance for earlier hikes.

Trading views

A pullback in DM yields has caused a sharp retracement in high beta EM, which provides a window for EM to tactically outperform as DM pricing is pushed back – meanwhile EM central banks continue to bring back carry.

Week in review

Over the previous week, Poland (75bp to 1.25%) and Czech (125bp to 2.25%) delivered hawkish rate surprises with more hikes likely, inflation in Turkey (19.9% y/y) rose less than expected keeping the door open for easing and Russian inflation rose to 8.1% y/y with the CBR expected to hike once more before year-end.

Week ahead and calendar

In the coming week, we have a host of inflation readings in the CEE region (Czech Republic, Hungary and Romania), Q3 GDP will be released in Russia as well as Poland, South Africa will present its Medium Term Budget Policy Statement (MTBPS) and finally we have a rate decision in Romania.

Forecasts at a glance

The recovery in EM economies continued at a robust pace during H1 2021 – though peak growth has passed, strong DM growth and the easing of pandemic effects, should support EM recoveries over the remainder of the year.

Core indicators

EM capital flowed out marginally last week (USD-0.2bn) with the Fed’s long-awaited tapering of its balance sheet having a muted effect thus far.

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