Emerging Markets: Economy Update

Transcription

1 MACRO REPORT Emerging Markets: Economy Update August 2014 Executive Summary Monica Defend Head of Global Asset Allocation Research Also contributing Annalisa Usardi Economist, US & LATAM Global Asset Allocation Research Andrea Brasili Senior Economist, Europe & EMEA Global Asset Allocation Research Alessia Berardi Economist, Japan & Asia Emerging Global Asset Allocation Research Riccardo Soggiu Senior Economist, Central Banks Global Asset Allocation Research CHINA: Even though the Chinese authorities carefully opened up the credit tap (with selective and targeted easing), we do not think that they will step back from the reforms process. We think the reforms process is on track and they will do whatever they can to keep the economic growth on track as well. The balance is challenging and the risks of the reform process derailing are well alive. EMEA: Needless to say, hoped de-escalation of the Ukrainian tensions vanished with the tragic Malaysian plane crash. The stage-three sanctions targeted to sectors (instead of simply hitting specified individuals or firms) will be launched soon and will have some impact on the economy in Russia but also in the countries with closer economic ties. Apart from the direct impact, the main issue is the increasing likelihood of a long term freeze in international relationships. Curiously enough, in the IFO institute web site, after the release of the July business sentiment (declining again in Germany on the back of the Ukrainian turmoil) there was an analysis titled: EU Should Couple Short-Term Sanctions against Russia with Long-Term Integration Policy. Difficult to imagine at the moment. LATAM: In Brazil, the electoral debate and the approaching elections make the low growth, high inflation mix the basis for a heated campaign which results are becoming increasingly difficult to anticipate. In Mexico, the overall growth outlook is considerably more downbeat than at the beginning of the year, with official projections (Banxico) ranging from 2.3% to 3.3%. Asia Focus on China. Even though the Chinese authorities carefully opened up the credit tap (with selective and targeted easing), we do not think that they will step back from the reforms process. We think the reforms process is on track and they will do whatever they can to keep the economic growth on track as well. The balance is challenging and the risks of the reform process derailing are well alive. 1. China Since end of March 2014, the Chinese authorities put in place several measures in order to stimulate economic growth and reach their targets in terms of GDP and unemployment rates. The measures have summarized in stimulus measures aimed at selected sectors (Infrastructure, Agriculture and SMEs) and targeted credit easing to the same sectors. In consequence of that, 1

2 Our internal China Composite Leading Indicator improved and We increased our GDP growth expectation at 7.4% YoY from 7.3%. All the measures adopted have been, so far, effective. Internal Forecast of Chinese GDP China Real GDP Forecast (YoY) 2014Q1 2014Q2 2014Q3 (E) 2014Q4 (E) Bear Bull 78% Probability Central Scenario 7.4 Consensus 7.4 IMF 7.0 Source: Bloomberg, CEIC as of July 28, The balance is challenging and the risks to the process are well alive as already discussed. One of the latest proof of the dynamism of the reforms process, is the announcement of the pilot SOE reform, in which a reduced range of SOE s is expected to transform their business model, to sell their stakes to the private sector (domestic and foreign) and to implement many other changes in order to improve their efficiency. (-1.1% YoY from -1.4% in May): higher commodity prices, like Oil, contributed to this softening of the deflationary dynamics. CPI grew by 2.3% YoY, less than in the Consensus expectations, because of the moderation of Food inflation. Even though the risk exists, deflation is not our base case, due to the upside pressure coming from wages and from the prices liberalization on a medium-long term. In an ongoing process of interest rates liberalisation and increasing efficiency in credit allocation, the monetary policy has to remain prudent to prevent a return to the old model of credit allocation and growth. However, (e.g. through Loan-to- Deposit ratio change in the accounting of numerator/denominator, for the banks lending largely to the SMEs and the agriculture sector 2. India Economy has to be unlocked, a big effort in terms of political reforms is needed. On the path indicated by the most recent PMI figures, the Industrial Production in May has grown well above the market expectations, by 4.7% YoY from 3.4% in April. In May as well as in June, the base effect largely contributes in pushing up the rate of growth. However, 2

3 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 FY 2015 FY 2016 Emerging Markets Economy Update August 2014 At the time of the in July, the new Government proved itself committed on the way of fiscal consolidation: they kept the Fiscal Deficit target at 4.1% of GDP for 2015 and indicated the path for the next two years, converging at 3.0% of GDP by Taking into account that (for the indigenous fertilizers), (Dividend and Profits and Other Non-Tax Revenues). The divestment item is always ambitious in the budget and quite poor in terms of outcome. The new Government deserves the benefit of the doubt. In June, to 7.3% YoY (below the RBI target for January 2015 at 8% YoY). to 7.4% YoY from 7.7% YoY. Going forward, we do not expect that the inflation rate will remain persistently below target,. In terms of weather conditions, rainfall and sowing are improving even though below normal so far. Recent Dynamics: Headline CPI (% YoY) & RBI Targets FY15 Target: 8% 6.0 FY16 Target: 6% 4.0 Source: CEIC, data as of July 28, Moreover, the commitment of the new Government towards fiscal consolidation is supportive of the Central Bank action. However,. As highlighted by our internal Taylor Rule, the June CPI numbers lowered the fair value for the policy rate by 75bp compared to the actual 8% (it was -25bp before). Triggers An effective Government in India, able to address the inflation issue and to revive capex, together with the RBI support. Risks The recent credit easing will result in the old way of misallocating resources, resulting in even more credit easing and derailing the efforts on the way of the transition. 3

4 EMEA 1. Russia It s already quite clear that the economy is slowing. Actually investment dynamics already started slowing at the end of 2012, but the uncertainty surrounding the relationship with foreing businesses amid looming sanctions, plus the tightnening financial conditions (again partly because of the sanctions and partly as a result of higher policy rates to stem financial outflows and possible volatility) caused an abrupt fall in Q In general, GDP came out up a meagre 0.9% YoY in Q1. It is clear that adjusting for seasonality, this should mark a negative QoQ variation in the realm of -0.3/-0.4%, confirming the fact that Russia could be headed for a mild recession this year. The IMF in its update (released the 24 th of July) revised downwardly to 0.2% the forecast for GDP growth in Industrial production also slowed a bit, but mainly in June; the impact of uncertainty and of credit conditions is evident (apart from the cited investments side) also on consumers: retail sales are progressively slowing also on the back of a sliding growth of wages and rising inflation: in June they showed a 0.7% YoY increase, the slowest pace since Russia: in Investments (%, YoY) Q Q Q Q Q Q Source: Datastream, data as of July 28, continue to move up as a consequence of ruble weakness and is hurting consumers purchasing power. As a consequence of ruble depreciation (4.4% vs USD since the beginning of July) inflation continued to trend higher, hitting 7.8% YoY in June (it was at 6.1% YoY in January and 7.6% in May). Also core inflation is on an even steeper upward trajectory and hit 7.5% in June (7.0% in May). The weakness in consumption is clearly related also to the fact that wage inflation is now running at the same level as consumers prices inflation hitting the purchasing power of households. Bank Rossii in a bid to sustain the exchange rate of the ruble, which was under severe pressure on the FX markets as political tension mounted and Russia sent some of its troops in Crimea to protect the ethnic Russian majority living there. As the situation continued to 4

5 fester, two further rate hikes have since been enacted, to 7.50% at the end of April and to 8.0% at the end of July. 2. Turkey A rebalancing between domestic and external demand seems under way. The Turkish economy is proving robust and is growing at a respectable pace. Q1 GDP showed a 4.3% YoY growth rate (in line with the pace of the previous 3 quarters) mainly supported by a strong gain in exports (11.4% YoY). A negative note is linked to the decline in investments (-0.5% YoY). But in general the picture seems positive with flows coming in favouring a stabilization and then a recovery of the currency. Despite this, some uncertainty is related to PMIs that continue to signal a worsening of perceptions and in June declined to 48.8 (the lowest since August 2011). In general however, some sort of rebalancing, with more external demand (and hence an improving external position) and less exhuberant domestic demand, seems on its way. On that, data on credit to the private sector (as reported in the last inflation report released on July 24th by the Central Bank) shows a trend growth that is lower than the average of the past seven years (considerably lower in the case of consumers loans) but, thanks to the easing enacted by the CBT retracing partially the hike in January, is slightly accelerating with respect to the spring. Looking at data on the trade balance, actually a further positive confirmation arrives: the trade deficit is shrinking thanks to growing exports and declining imports (in value terms). Actually in H1 exports rose 6.7% while imports declined 4.8%. The current account deficit is still wide (and the trade deficit wider) but it more than halved in May with respect to the corresponding month of 2013 and the cumulative first five months of the year totalled slightly less than 20 bln USD vs 32.2 bln last year. The slight slowdown in domestic demand and the appreciation of the currency favoured hitting an early peak in inflation that after reaching 9.66% YoY in May, declined to 9.16% in June. Given that on the producer side the same phenomenon happened in April (with YoY PPI at 12.98%) followed by two consecutive declines (at 9.75% in June) this bodes well for the prospects. Actually in the inflation report CBT confirmed its long term forecasts for inflation, viewing it at 7.6% at year end, mainly due to the observed spike in particular in food prices, going down to 5% by the end of 2015 (the relevant policy horizon). The Turkish Central Bank cut its one week repo (since January this year its reference rate) in three consecutive meetings (May, June and the 18th of July) from 10% to 8.25% but maintained the overnight rate (the upper bound of the corridor, that can be easily activated in case of need or emergency) as a consequence of the inflows and the stability and gains of the currency. While the forecast for inflation could be a bit optimistic, the main risk is the renewed upward trend in domestic credit figures. Triggers If the ECB proves successful in enhancing Eurozone conditions both in financial markets and on purely macroeconomic terms, this will have clear positive spillovers in the region. Risks Main risks are still on the geopolitical side: the Ukraine-Russia issue can impact via volatility in the market, commodities prices and also direct trade links. 5

6 Latin America While Q1 GDP confirmed the continued slowdown in the economy, higher frequency activity indicators point to continued weakness also in Q2. Confidence is also declining both for Businesses and Consumers. remains high although there have been some signs of deceleration. On the background, the electoral debate and the approaching elections make the low growth, high inflation mix the basis for a heated campaign which results are becoming increasingly difficult to anticipate. BCB is likely to remain on hold as the latest COPOM minutes explicitly excluded cuts in next meetings. We expect some acceleration in the second half of 2014 as US growth accelerates, bringing higher demand for Mexican exports. Also internal demand should strengthen somewhat, as few activity and sentiment data appear to hint an improvement. Yet, signals still appear to be mixed. The overall growth outlook is considerably more downbeat than at the beginning of the year, with official projections (Banxico) ranging from 2.3% to 3.3%. Banxico will likely remain on hold unless further unanticipated weakness both on internal and external demand requires further stimulus. 1. Brazil We remain quite gloomy about the forecast for this year's growth in Brazil. While economy that expanded in real terms only 0.2% QoQ and 1.9% YoY (Q2 data will be released at the end of August), for the third consecutive month, -0.6% MoM (-3.2% YoY); Capacity Utilization fell to 80.7, in a downward trend since mid-2013, the Economic Activity Index for May declined both in monthly and annual terms ( -0.18% MoM, -0.17% YoY), anticipating weak growth also for the second quarter., the Composite PMI remains on the edge of the contraction level at 49.9 for May, while the CNI Industry Survey keeps pointing south since the beginning of the year, posting a 46.4 reading in July (47.5 in July). FGV yet the CNI Consumer Confidence index declined to in July (from 107.6). Going forward some deceleration in the labor market (the unemployment rate has been increasing in the six metropolitan areas since January, although being as low as 4.9%) could be at the root of a worsening trend in consumers' expectations, in addition to a deceleration in credit growth and a high consumer indebtedness. is currently above the Central Bank s target level and at the ceiling of the tolerance bands (4.5% +/- 2%). IPCA-15 Consumer Price Index was up 6.51% YoY in July (6.41% YoY prior), despite the fact that month-on-month figure highlighted a deceleration (0.17% MoM vs 0.21% prior). Several components of the Index posted either a deceleration or a decline compared to prior month: according to the IBGE statistic release, the Transportation component was the main driver of this decline, falling -0.85% In July vs 0.50% in June). Food and Beverages also decreased -0.03% in July, vs 0.21% in June. The main contributions to July data and changes in the Index components are reported below. 6

7 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Emerging Markets Economy Update August 2014 IPCA Index, MoM Change (%) and Contributions The latest manufacturing data reversed the expansion trend of the previous months IPCA-15 YoY % Target Target Ceiling 60% 50% 40% 30% 20% 10% 0% -10% -20% Source: Pioneer Investments, July 28, June July According to the statement released on the BCB website on the 25th of July, the Central Bank is making available approximately 45 bn Real (USD 20.2bn) by introducing some macro-prudential rules aimed at unclogging the credit channel. Banks are now allowed to use up to 50% of their reserve requirements (estimated 30 bn Reais), to originate new loans or to buy loan portfolios. The monetary authority also eased some constraints on consumer credit by changing the risk calculations for payroll, auto loans and consumer financing in general, by reducing capital requirements as consumers repay their debts. The low growth-high inflation mix is representing a difficult dilemma for the BCB: while the COPOM is trying to target the deceleration in economic activity with these credit measures, it is also reinforcing the message that no Selic rate cuts are on the horizon. Yet, we believe a risk on this side is that if such easing measures were to succeed, they might have some inflationary consequence as well. Presidential Elections Focus The official campaign period started on July 6th. According to the latest Datafolha polls, the Brazilian Social Democratic Party (PSDB) candidate Aecio Neves (Minas 7

8 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Emerging Markets Economy Update August 2014 Gerais Senator) has made significant progresses in closing the gap with President Dilma Rousseff in the event of a runoff round to only 4 percentage points, whilst Rousseff remains a clear favourite in the first round of voting (36-38 % of voter intentions vs of Aecio Neves). IBOPE polls highlight that still some doubts on the second round vote are possible as Dilma Rousseff still stands at 38% of voter intentions at the first round, which is higher than the sum of the voters' intentions for all other candidates (35%). In an eventual second round, Dilma Rousseff still stands at 41% vs 33% for Aecio Neves (gap closed by 1% only compared to previous polls). 2. Mexico Mexican growth has been slow to recover and accelerate in past quarters, posting in Q1 a modest 0.3% QoQ growth (1.8% YoY, 0.1% in 4Q13) on the basis of very weak internal demand. Private Consumption and Gross Fixed Capital Formation failed to accelerate and Government Consumption also disappointed. Based on this disappointment and following weak readings also for the IGAE GDP proxy, the Mexican Central Bank in May cut its growth expectations for 2014 from the 3%-4% range to 2.3% - 3.3%; then, surprisingly cut rate by 50bps in its June meeting, bringing the primary interest rate to 3%. Also the Ministry of Finance at the beginning of the year estimated a very bullish 3.9% growth, subsequently reduced to the current 2.7%. (%) Lower inflation allows Mexico s central bank to cut policy rates CPI YoY CPI Core YoY target -1% target target +1% Source: Bloomberg, Pioneer Investments, July 28, After recovering in April to positive territory, the IGAE monthly GDP proxy moved back to the negative range in May, highlighting mixed signals for 2Q 14. The trend in weak consumption demand appears to be partially reversed in 2Q by some recovering tendency in Retail Sales, which posted in April a strong 1.2% MoM increase, yet followed by a decline of 0.1% MoM in May. On an annual basis, though, the index moved to positive territory, at 1.6% YoY growth in May. Also the Confidence Consumer index inched marginally higher In June, from 90.7 to 91.0, signaling a possible reversion in the trend. All in all, these are some limited positive signals for household consumption going forward and this make us mildly optimistic about an acceleration in the second half of the year. On business sentiment, some of the dampening effect coming from the uncertainty on final demand should moderate, as household consumption recovers and global demand (in particular US growth) Is expected to return to higher levels. Political 8

9 negotiations and delays in passing the enabling reforms approved in 2013, failed so far to provide a clearer framework for business activity and new investments in the short to medium term; yet after months of delays, the Senate recently passed the secondary laws for the Energy reform, which is the flagship item in the President's reform agenda, and this should enable to actually start seeing some concrete results in terms of private investments, although likely only from next year. HSBC Manufacturing PMI is stable in the expansionary territory, at around 52, since February, without signs neither of deceleration or acceleration. Industrial Production remained basically flat In May, compared to April, by increasing 0.1% MoM (0.5% prior), and bringing the annual growth rate to 1.6%YoY. On average, industrial production growth averages a meagre1.18% so far since the beginning of the year. On the inflation side, CPI data were a bit lower than expected, with CPI increasing 0.17% MoM in June (up from -0.32% MoM in May) and 3.75% YoY (up from 3.51% in May). CPI Core was up 0.21% MoM (up from 0.09% in May). Also the biweekly figures surprised marginally on the downside, with the data referring to June 30 posting a 3.80% YoY reading for the Bi-Weekly CPI (up from 3.71% of previous reading). Based on the weak economic data, the Mexican Central Bank in May first cut its growth expectations for 2014 from the 3%-4% range to 2.3% - 3.3%; then, surprisingly cut interest rates by 50bps in its June 6th meeting, bringing the overnight rate to 3%. Justifying this move, several factors were cited: the weak 1Q GDP, the weak GDP monthly proxy, the weak 1Q US GDP and the room given by a well behaved inflation rate (which is not supposed to accelerate this year given the weak growth prospects). In July's meeting, Banxico left the overnight rate unchanged. We do not see Banxico effecting other rate cuts this year as expressly mentioned in their comments, yet, were the economy to further deteriorate, possible supportive action could not be ruled out. Triggers Pickup in US activity could positively affect economic activity and exports (Mexico). Higher lending to the private sector, via revised role of the Development Bank, could trigger higher investments. (Mexico). Government spending in more traditional but more easily implemented projects (roads, bridges) could generate immediate payoff into the economy, lifting growth. (Mexico). Risks Slowdown in China could negatively affect exports (Brazil). Argentina s decline in activity and demand could hurt (as it did in Q1) Brazilian exports. Fiscal discipline at risk in an election year, especially given current weak economic performance (Brazil). Deteriorating confidence and higher rates could further slow-down the adjustment process towards higher investments (Brazil). 9

10 Important Information Unless otherwise stated, all information contained in this document is from Pioneer Investments and is as of July 28, Unless otherwise stated, all views expressed are those of Pioneer Investments. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any services. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies. Date of First Use: August