A Changing Global Environment Facing Emerging Markets

Transcription

1 A Changing Global Environment Facing Emerging Markets June 2011 Deutsche Bank All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access IR at or by calling DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1 Fernando Losada Fernando.Losada@db.com

2 Global economic outlook GDP growth (%) CPI inflation (%) F 2012F F 2012F Global G US Japan Euroland EM Asia (ex-japan) China EMEA LatAm Argentina Brazil Colombia Mexico Peru Venezuela Source: DB Global Markets Research (May 2011)

3 The wheels of risk are turning Global macroeconomic environment is changing near term in three ways: Concerns about US double dip have faded. Gradually, focus is turning to timing of withdrawal of monetary stimulus and sustainability of fiscal stance. Europe is becoming less of a driver for global markets. European policy makers likely to avoid extreme scenario of uncontrolled default and/or Eurozone breakup. EM economies have turned from being a source of disinflation to becoming a medium term source of inflation. 2

4 The wheels of risk are turning bonds and equity While we continue to believe that US interest rates will eventually have to increase, Fed core members (Bernanke, Yellen, Dudley) are still dovish. Inflation is edging upwards on the back of fuel prices. However, the combination of the negative output gap closing at a slow pace, very high unemployment and the housing sector still in trouble suggests no hikes are imminent. Outlook for US and EU equity markets is moderately positive on the back of attractive valuations, while valuations across EM look somewhat stretched. 3

5 The wheels of risk are turning - FX We expect the dollar to be weak against other central currencies over the medium term, as the Fed will remain one of the most dovish central banks. We see room for Asia FX appreciation, but we favor countries with high external growth beta and C/A surpluses versus economies led by domestic demand growth with C/A deficits. 4

6 Oil A renewed challenge Energy price-induced slowdown of the global economy is a justified concern. Every US recession since 1973 has been preceded or coincided with a sharp oil price increase. Two important differences exist nowadays relative to the 1970s, however: Monetary policy is extremely accommodative, allowing the economy to better absorb an oil price shock. The energy share of the economy is lower than before; household energy consumption currently at 9% of GDP versus 17% in the early 1970s. 5

7 Some simple US oil arithmetic WTI prices at USD100/barrel are consistent with retail gasoline prices in the US at USD3.40/gallon. Every dollar increase in WTI price results in a USD0.026 increase in gasoline prices, i.e. WTI price should increase by USD38/barrel for gasoline prices to rise by USD1/gallon. A USD1/gallon increase in gasoline prices leads to a USD140bn tax on personal consumption per year. WTI prices averaged USD79.40/barrel in WTI at USD110/barrel would offset the positive boost from the payroll tax reduction announced at the end of last year. 6

8 Impact of oil prices on PCE WTI price (USD/barrel) Retail gasoline (USD/gallon) Energy tax on personal consumer expenditure (USDbn)

9 Oil spike: Winners and losers In general, EM fares better than DM during oil spikes. In previous oil crises, increases of USD10/barrel were associated with drops of 0.4% in DM growth and 0.2% in EM growth. In the EM universe, countries likely to benefit from higher oil prices include Colombia, Kazakhstan, Russia and Venezuela. Countries such as Hungary, Israel, Turkey and Ukraine will probably be net losers. 8

10 Over the medium term, OECD countries face a potential debt overhang EM debt dynamics compares favorably with developed world Advanced economies have a tougher fiscal challenge ahead % of GDP Government debt % of GDP Advanced Countries Developing countries EM Countries Advanced Economies 60 Forecast Required primary balance in order to stabilise debt/gdp in 2010 EM s fairly loose fiscal stances look tight vis a vis DM. Less indebted EM should grow faster, continuing to attract capital. But complacency in EM may hurt later on 9 Source: IMF WEO, DB Global Markets Research

11 IMF 2003 WEO warned about public debt crises in EM! 10 Source: IMF WEO

12 Greece Hungary Ireland UK Japan Egypt Portugal Romania Poland Pakistan France Ukraine Italy Cz. Rep. Malaysia USA Vietnam Spain Colombia Mexico India Austria Germany Belgium China Netherlands Turkey Brazil Philippines Thailand Taiwan Indonesia Israel S. Africa Switzerland Venezuela Australia Argentina New Zealand Sweden Canada Singapore Korea Denmark Finland Russia Chile But now EM debt outlook looks relatively strong Adjustment needed to stabilize public debt ratios Primary Balance, % of GDP +15 Range of primary balance Required Primary Balance Source: IMF, Haver, DB Global Markets Research

13 Fiscal effort in developed countries will have to be substantial over the next few years IMF projections of public sector debt/gdp ratios: High and increasing in developed countries, low and stable in LatAm Source: DB Global Markets Research

14 EM economies enjoy structural advantages Population age is also favoring EM outlook Dependency Ratios EM 20 Industrial EM s growth differential vs advanced economies Growth differential EM vs Industrial Countries (pp) 7 Growth differential EM vs Industrial Countries 6 Avg differential per decade Source: IMF, Haver, DB Global Markets Research 13

15 EM economies have achieved policy improvements EM ratings indicate improvement in fundamentals Credit model predictions based on our forecasts BBB+ BBB Asia BB+ BB EMEA BBB- BB- B+ Latin America B Source: IMF, Haver, DB Global Markets Research 14

16 The ultimate proof of improvement: lower measures of market risk Degrees of mean reversion in EM currencies EMFC volatility REER Half Life (in months) % 30% 25% FX Activity Commodity 25% 29% 29% 28% 24% % Brazil Mexico Russia Turkey 15% 10% 5% 0% 13% 11% 11% 10% 7% 7% 6% Bra Mex Rus Tur Source: DB Global Markets Research 15

17 LatAm FX valuation: Real Effective Exchange Rates (Jan 2005=100) 16 Source: Global Market Research, IIF

18 EM financial markets have significant room for further development EM has less than half the financial depth of developed countries Such a gap is even bigger in Latin America 17 Source: DB Global Markets Research

19 KZT RUB ZAR UAH EGP PLN HUF TRY RON CZK ILS SKK MYR IDR THB CNY INR PKR PHP HKD KRW VEB CLP ECU ARS COP PEN BRL MXN LatAm: Commodity blessing this time around 35 Net commodity export by country (% of GDP) EMEA Asia LatAm Energy Metals Food Source: DB Global Markets Research

20 EM: Rebalancing challenge I Net savings by region (% of world GDP) Investment by region (% of world GDP) ADVANCED EMEA EMASIA MEAST LATAM EMEA EMASIA MEAST LATAM ADVANCED (lhs) Source: DB Global Markets Research

21 EM: Rebalancing challenge II 0,30% 0,25% 0,20% 0,15% 0,10% 0,05% 0,00% FDI to emerging markets (% of world GDP) EMEA EMASIA LATAM 5,00 4,00 3,00 2,00 1,00 0,00-1,00-2,00-3,00-4,00 Primary balances (% of each regional GDP) LATAM EMEA EM ASIA Source: DB Global Markets Research

22 EM Monetary Policy: Differentiated sensitivity to EU shock 21 Source: DB Global Market Research

23 EM Rates are sensitive to global drivers Rates sensitivities to macro drivers 2Y Rates Activity CPI Policy Rate CDS 10Y US Rate BRL CLP MXN COP PEN HUF PLN CZK ZAR TRY ILS Y Rates Activity CPI Policy Rate CDS 10Y US Rate BRL CLP MXN COP PEN HUF PLN CZK ZAR TRY ILS NOTE: Shocks of 100 bp for each of the variables referred to (activity measured in YoY terms) 22 Source: DB Global Market Research

24 Kazakhastan South Africa Russia Israel United Arab Emirates Ukraine Turkey Hungary Slovakia Poland Czech Republic Romania Peru Chile Brazil Argentina Venezuela Colombia Mexico Taiwan South Korea Philippines Thailand Malaysia Singapore Indonesia India EM: Chinese sensitivity Existing trade links (% of GDP) LATAM X to China M from China ASIA X to China M from China EMEA X to China M from China 0 23 Source: DB Global Markets Research

25 The banking contagion channel to EM Regional loan exposure (USD bn) Spain Portugal Greece Total as share of Total Credit to Private Sector LatAm % AR % BR % CL % CO % MX % PE % EMEA % Asia % Source: DB Global Market Research 24

26 IMF medium term forecasts sums it up: LATAM is expected to regain the 4% growth path after having the milder 2009 recession and the stronger 2010 recovery, only behind non-japan Asia and Middle East 25 Source: IMF

27 Latin America: Economic Outlook 26

28 Growth is slowing down but still remains robust GDP growth % YoY ARG BRA CHI COL MEX PEN VEN % GDP Current account balances ARG BRA CHI COL MEX PEN VEN Inflation % YoY ARG BRA CHI COL MEX PEN VEN LATAM forecasts (% yoy unless stated) E 2011F 2012F Real GDP grow th Priv. consumption Investment Inflation Exports, USD bn Imports, USD bn Industrial production Unemployment (%) Fiscal bal. (% of GDP) CA bal. (% of GDP) Source: DB Global Markets Research

29 Argentina: Nervousness on the rise Growth has remained strong, hovering around 9%, but policies are certainly unsustainable as state intervention prevents investment. In the absence of stronger investment, expansionary policies simply push inflation up. The government will have to eventually abandon the current policy setup as the exchange rate can not be the only tool to maintain stable (although very high) inflation. The peso is not yet overvalued but the pace of appreciation is too fast. 28

30 Argentina: Election and beyond The outcome of the coming presidential election will determine the future policy path. Currently, the most likely scenario is reelection. This could be positive if moderation is achieved. Otherwise, another round of massive capital flight is likely to occur, becoming the market-driven adjustment mechanism. Fundamentals are strong but somewhat for the wrong reasons. Nonetheless, a marginal improvement in policies could make Argentina a solid performer for years. 29

31 Brazil: Lower growth, higher inflation? The real economy is on a deceleration phase and will most likely grow below potential this year. Inflation expectations deteriorated sharply since 4Q10 but appear to have stabilized now, although at relatively high levels. The Central Bank has made it clear that it will tighten monetary policy at a slow, gradual pace, complementing the hikes with macro prudential measures. The currency has appreciated the most among EM peers but flows are still supportive. 30

32 Brazil: Necessary adjustment, sooner or later Annual inflation surpassed the ceiling of the band in April for the first time since July Although we expect it to decline towards year-end, it will remain above the medium term 4.5% target for the foreseeable future. Protracted high inflation is to impose political costs on President Rouseff, which in turn could elicit a more energetic policy response, although probably not this year. Credit origination is decelerating after last year s macro prudential measures, although slowly. 31

33 Chile: Less exciting but still exemplary The pace of economic activity moderated during the last quarter but we expect it will accelerate again in the coming months helped by the consolidation of a global recovery path. The economy is vulnerable to oil price shocks and energy bottlenecks, so developments there will affect performance. Inflationary pressures are becoming more evident amid a closing output gap and a tight labor market. This notwithstanding, we project inflation to be back within the CB range during We expect the Central Bank to continue hiking interest rates although conditioned to the tightening pace in the US. Intervention rates could go up to 5.75%-6.00% within the next twelve months but the final position will depend on global rates. CLP has been trading in the low part of the expected range on the back of strong domestic growth, elevated copper prices, and the expected increase of rates differentials. Additionally, the CB seems to be less worried about appreciation now. Volatile commodity prices, however, remain a serious risk. 32

34 Colombia: A successful convergence play Recovery in economic activity picking up speed. Negative output gap to close during 2H11. Inflationary pressures building up on the back of recovering domestic demand coupled with supply side shock since 4Q10. BanRep on the initial phase of monetary tightening cycle. Average annual headline inflation likely to increase vis a vis 2010, although remaining within the upper part of the target band. Colombia within a new inflation regime, with equilibrium rates near target levels. 33

35 Colombia: A successful convergence play BanRep to normalize monetary policy gradually until reaching short term real interest rates of some 250bp. BanRep to act slowly and preemptively amid global market uncertainty. We expect target repo rate at 4.75% by Dec 2011, with another 125bp worth of hikes in MinFin worried about currency appreciation, daily dollar purchase strategy to continue along with dollar deposits abroad. Chances are good for COP curve flattening, as BanRep engages in tightening exercise and fears of substantial inflation in the medium term recede. 34

36 Mexico: Recovery under way Initial phase of the recovery was led by exports. Growth is now more balanced, with exports, domestic consumption and investment becoming significant contributors. Negative output gap likely to close down during 2H11. GDP to grow by more than 4% this year. But is that growth pace sustainable? 35

37 Mexico: Ties to the US Industrial production cycles closely related. Full commercial and financial integration of both economies, with well over 80% of Mexican exports sold in US markets. Gradual recovery in US economic activity currently benefiting Mexico. Questions remain about the sustainability of the US recovery and the possible convergence towards lower average GDP growth rates. Comparative advantage points to energy complex but constitutional barriers prevent private participation in the sector. 36

38 Mexico: Inflation and interest rates After a spike during 4Q10, annual inflation has edged downwards and it appears to be under control. The current environment of high commodity prices, however, poses challenges to the sustained convergence towards medium term target levels. In addition, domestic demand is no longer depressed, thus contributing to fuel inflation at the margin. Banxico will probably stay on the sidelines this year, but it remains vigilant and ready to hike since the beginning of

39 Mexico: Currency dynamics The exchange rate suffered during as a result of the deterioration in the US economic outlook. MXN recovered gradually with the stabilization and eventual improvement of expectations about US growth. MXN currently responding to robust foreign capital flows and more stable global outlook. Appreciation pressures to continue, so Banxico unlikely to be able to reverse the trend. Policy actions likely to be geared towards reducing volatility and slowing down pace of appreciation. 38

40 Peru: Among the region s top growth performers We expect a very soft deceleration in the growth pace, towards potential levels, during Average growth performance likely to remain at the top of LatAm. Inflation to remain well behaved (at or below 3%), on the back of expansion of productive capacity and conservative monetary policy. PEN to remain well supported by financial and especially strategic foreign investment. We expect it to be near 2.70/USD by year-end. 39

41 Peru: The region s top growth performer The real economy is still operating above potential, which suggests that Central Bank will continue tightening the policy rate through yearend and beyond. We expect target policy rate at 4.75% by Dec 2011, with further hikes in 2012 likely. Central Bank to continue intervening in the FX market to avoid stronger currency appreciation. PEN curve to flatten both because of increase in short end and compression in long end post presidential elections, assuming expectations of no change in policy regime. 40

42 Venezuela: Slow recovery amid high oil prices The real economy has been recovering since 2H10, although at a slow pace. We expect GDP to expand by at least 2% this year. Inflation is to remain at the highest levels in the region, along with Argentina, because of supply bottlenecks and very active fiscal spending. With oil prices hovering around USD100/barrel, the current account surplus is likely to be at least USD20bn this year. The robust supply of dollars from the trade account suggests the authorities will fuel the demand for imports via Cadivi and Sitme to reduce shortages, especially ahead of next year s election. 41

43 Venezuela: Presidential election President Chavez still holds the upper hand to win reelection next year. His popularity suffered last year but has been recovering in 2011, because of the robust fiscal transfers and the public approval of the handling of the flooding emergency. The opposition is to do a good election if it lines up behind a coalition candidate, although it is still early to determine whether there will be such a unanimous choice. 42

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