Emerging Markets Macro Report May 2014

Transcription

1 Emerging Markets Macro Report May 2014 MACRO REPORT 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 INDIA: In recent elections NDA, the coalition led by the BJP party, gained 334 seats, with BJP alone winning 282, more than the majority mark of 272. On the economic side, the election result, implying a stable government, offers the prospect of an effective reforms implementation to revive the economy and fight inflation. While it s widely expected that the process will be gradual, close attention will likely be paid to the early measures. EMEA : The situation in Ukraine remains the main issue with respect to the outlook for the area. While tensions in the eastern regions of Ukraine persist, some tentative steps towards the hoped de-escalation have been taken. The next focal point will be the general election that should take place on May 25. On the purely macroeconomic side, some evidence of a slowdown is emerging in South Africa and Russia with a less clear tendency in Turkey, while Hungary and Poland show a quite robust economic cycle. LATAM : Weak economic performance combined with still high inflation could lead the Brazilian Central Bank to hike rates further, although some signs of receding inflation might confirm that monetary policy is having, as expected, a lagging effect. is still the missing variable for Brazil, for which the IMF expects economic performance to be below 2% for In Mexico the recent National Infrastructure Plan, coupled with energy reform, should increase potential growth substantially over the medium- to-longterm. Short-term, implementation issues have to be overcome in order to ensure that the full potential of reform is attained. Although some signs of pickup in activity in Mexico are now emerging, there is still some conflicting data as to whether there a sustainable acceleration is underway. Still, expectations for growth remain in the 3% range according to the IMF. Asia India elections: NDA, the coalition led by the BJP party, gained 334 seats, with BJP alone winning 282, more than the majority mark of 272. On the economic side, the election result, implying a stable government, may offer the prospect of an effective reforms implementation to revive the economy and fight the inflation. While it s widely expected that the process will be gradual, close attention will be paid to the early measures. 1. China After Q1 2014, GDP growth registered at a healthy 7.4% YoY. On the basis of our internal leading indicator, we expect a slight deterioration in Q2 to 7.3%. Overall, on the year, we expect that Chinese GDP will grow at 7.3%, lower than the previously expected 7.5% and with a narrower confidence band, between 7.0%-7.5% with 68% of probability. We do not expect a sharp slowdown in the short term. 1

2 We have lowered our Chinese GDP growth expectation to 7.3% from 7.5%. We do not expect a sharp slowdown in the short term. Internal Forecast of Chinese GDP China Real GDP Forecast (YoY) 2014Q1 2014Q2 (E) 2014Q3 (E) 2014Q4 (E) Bear Bull 68% Probability Central Scenario 7.3 Consensus 7.3 IMF 7.5 Source: Bloomberg, CEIC as of May 2014 A first glance at the second quarter of the year shows a certain resilience in terms of external sector contribution to growth: the April numbers, at net for over-invoicing, were good both in terms of domestic demand (imports) as well as external demand (exports). However, the April figures of economic activity confirmed a slowdown in economic growth mainly related to the property sector. The transition of China s growth model continues to hold plenty of risk. We expect that the Government will proceed without any large-scale stimulus; rather, they will likely fine-tune policies to mitigate the slowdown as they did at the beginning of April. It's worth highlighting that there are some discrepancies in the YoY figures when compared to the QoQ annualized: The latest ones imply major economic weakness that could lead to GDP growth between 6%-6.5%. If this is confirmed, or if a major slowdown happens, a significant cut in the bank reserve requirement ratio (200 basis points at least) would be, in our view, the only tool left to help avoid a miss on GDP growth. The April figures confirmed the picture of deflation in place at the corporate level (PPI -2.0% YoY). This was mainly due to an excess of capacity in the system as CPI softened 1.8% YoY versus March because of a decline of in the food component. Even though the risk exists, deflation is not our base case given expectations for upside pressure coming from wages and from price liberalization. An economic slowdown would suggest a monetary loosening. However, given an ongoing process of interest rate liberalisation and increasing efficiency in credit allocation, policy should remain prudent to prevent a return to the old model of credit allocation and growth. 2. India India s economy has to be unlocked, and a big effort in terms of political reforms would be required. GDP is expected to grow at 4.9% YoY in Q1 2014, bringing yearly growth in FY 2013/2014 to 4.7%, or well below the potential rate of about 6%. Several policy measures have been taken in the last year with respect to currency stabilization or external adjustments to promote a cyclical recovery. However, signs of recovery remain faint (industrial production in March declined by -0.5% YoY from -1.8% YoY in February) and much effort will be required in terms of political reforms to revive capital expenditures and unlock the economy. 2

3 As expected, after a decline due to a good harvest, more recently the inflation rate has started to pick up: 8.6% YoY in April from 8.3% YoY in March. Some further upside pressures are expected in the next months, coming from the El Nino impact on vegetable prices. The RBI s FY 2016 inflation target of 6.0% will be a challenge, especially if there is a lack of coordination between the RBI and the new Government on fighting inflation. Recent Dynamics: Headline CPI (% YoY) & RBI Targets 12,0 10,0 % 8,0 FY15 Target: 8% 6,0 FY16 Target: 6% 4,0 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 FY 2015 Source: CEIC, data as of April 30, 2014 Given the recent dynamics of inflation, we expect the RBI to be on hold for the time being. However, in the short term, the risk for both interest rates and inflation expectations are on the upside. It will be crucial for the next government to show the same commitment as the RBI to fighting inflation in order to anchor expectations and restore confidence in the country. Triggers An effective government in India after the elections, able to address the inflation issue, together with RBI support. Risks The Chinese deleveraging will become much more serious if the property market sharply weakens: about 40% of local government debts have been paid by land sales revenues. 3

4 EMEA A referendum was held on May 11 in the two eastern regions of Ukraine (Donetsk and Luhansk) that are currently controlled by pro-russian separatists. The regions have seen in the last month or so violent clashes between Ukrainian government troops and the separatists which have led to fatalities and other casualties on both sides. According to the results released by the separatists, 75% of the population turned up to vote in the two regions and over 90% of the votes cast were in favor of secession from Ukraine. The votes were called "illegitimate" by the current provisional government in Kiev (nationwide elections are currently scheduled to be held on May 25) and not recognized by the EU and the US. Russian President Vladimir Putin released a statement in which he stated that Russia "respects" the show of popular will and asked for the "peaceful" implementation of the results, but did not call for the annexation of the two regions by Russia, as happened after a similar vote was held in Crimea in March. At the present time the situation seems to be stalled pending the nationwide May 25 elections so that there can be a fully legitimate government in power in Kiev with which to negotiate. The current aim of some separatists seems to be to acquire a high degree of independence within a loose federal Ukrainian state, but others seem to want to join the Russian Federation. President Putin at the present time has not clearly indicated what his objective is, but is likely to do so when a government is formed in Kiev. 1. South Africa The ANC won the election with nearly the same margin as 5 years ago. South Africa s first general elections after the death of Mandela resulted in another success for the ANC, the ruling party since While the success was widely expected, the 62.2% result (only slightly below the 66% obtained in 2009) was in some ways higher than expected. In fact, many sources predicted a significant erosion of consensus for the ruling party. It is quite easy to imagine a relatively stable transition to the new administration; the president will be again Jacob Zuma and there are unlikely to be radical policy shifts. Nevertheless, news on the economy actually suggests that some revamping is needed: manufacturing PMI declined in April to 47.4, while manufacturing production in March was down -1.9% MoM (0.7% YoY from 1.5% in February). There is some weakness also in domestic demand (retail sales in February fell -0.2% MoM with YoY growth slowing from 6.4% to 2.2%) while unemployment rose in Q1 to 25.2% from 24.1%. The weakness of the rand in early 2014 took a toll on the inflation picture: CPI rose to 6.0% in March (it was at 5.4% in December 2013) while PPI climbed to 8.2% YoY. Nonetheless, the weakness in domestic conditions and the recent strengthening of the currency should stop the acceleration relatively soon. The SARB raised rates at the end of January from 5% to 5.5%, citing the impact of the weaker currency on inflation as the main reason. While, as noted, inflation accelerated a bit in February and March, the currency has stabilized and regained some value since the sudden decline at the beginning of the year. With a target for 5% inflation in the medium term, a current inflation target range of 3 to 6%, and a very high unemployment rate, in our view, the central bank is not in a hurry to act again if not forced to by a renewed sharp weakening of the currency. It should however be noted that it has a medium-term tightening bias, with Governor Gill 4

5 Marcus stating on April 8 that the "accommodative" policy stand cannot be maintained for an indefinite period and that markets should expect some modest further tightening before year end; A couple of 25 basis point increases before year end are in fact currently priced in. 2. Russia The economy in Russia is slowing down, again more strongly on the producers/ business side than on the consumer side. Looking at soft indicators, PMIs are well below 50 in the last two months both for services and manufacturing; industrial output slowed to 1.4% YoY in March (from 2.1% in February) while investment in productive capacity dipped further in March (-4.3% YoY down from -3.5%). This seem confirming a quite bad outlook for private investment given the current uncertainty and tightening in financial conditions. On the positive side, consumer demand has been resilient: retail sales grew at 4.0% in March (3.9% in February) sustained by a labor market that is in a positive mood (unemployment declined further in March to 5.4% from 5.6%). However, in our view, it is clear on the consumer side that the tighter financial conditions and higher rates will act to slow spending. Russia: Investment in Productive Capacity, Var. % YoY % Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Source: Bloomberg, data as of May 15, is accelerating, evidence of still weak competitive pressures in the economy. ary pressures are on the rise as a consequence of the pressures on the currency, which has depreciated by 7.7% vs USD since the beginning of the year. CPI inflation rose to 6.5% in April (6.0% YoY in March). In addition, PPI are on a clear rising trend and climbed in March to 5.0% YoY from 3.2%. If the weakness of the currency in January-February is the first motivation, the second is likely the wide pass-through allowed by still weak competitive pressures in some sectors of the economy. In March, Bank Rossii was forced by the fallout of the political unrest in Ukraine to increase its key rate used for one-week open market (liquidity providing and absorbing) operations from 5.50% to 7%. This was 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 annexed Crimea. Sanctions were implemented by 5

6 NATO countries in response to Russia s unilateral act and Russia s financial markets weakened as a result of the heightened political uncertainty. A further rate increase from 7% to 7.5% was enacted in April and justified with higher inflation risk. This followed a rating downgrade by S&P which left the nation's bonds only one level above junk, at BBB-. If the political situation does not worsen and the currency does not come under renewed pressure the rate increases enacted up to now may be sufficient to return inflation towards the bank's 6% target by year end. Renewed tensions would probably force the bank to further raise interest rates to protect the currency even though economic growth is very modest at the present time. Triggers Stronger growth in domestic consumption can help alleviate external imbalances. After the electoral ballots, a reform effort could start and have a positive impact in South Africa. Risks Main risks are on the geopolitical side: The Ukraine-Russia issue can impact via volatility in the market, commodities prices and also direct trade links. Other risks are linked to the fact that the buoyant situation in global rates could trigger some complacency in policies and lead to stresses if rates reverse. 6

7 LATAM Brazil: Recent data on activity signals weakness while the IMF revised down growth expectations to 1.8% YoY growth in 2014 and 2.7% in The revision of Industrial Production methodology could lead to upward revisions to 2013 GDP while the effects on 2014 could be adverse, worsening the outlook. Mexico: With inflation gradually converging to the center of the target band, growth is becoming the main concern for the Mexican Central Bank. For this reason, Banxico may remain on hold for the time being (its next scheduled meeting is the 6th of June) as it awaits the U.S. Fed's moves. Although signs of stabilization and improvement are starting to appear, downside risks are pronounced. According to April's WEO, the IMF expects 3.0% YoY GDP growth in 2014, followed by 3.5% in Brazil IBGE (Istituto Brasileiro de Geografia e Estatistica) introduced for the month of March a new methodology for the calculation of Industrial Production, leading to upside revisions for Industrial production output rose 2.3% YoY in 2013 (old methodology: 1.2%), with manufacturing growing 3.0% (old methodology: 1.5%) and mining and oil falling 4% (confirmed from previous methodology). This revision might have effects on GDP numbers, as it may imply some minimal upward revisions to 2013 growth and reduce growth expectations for First, the revision highlights stronger growth in the first half of 2013 followed by a faster contraction over the rest of the year, therefore implying a negative momentum carried over into In addition, some of the sectors that increased their weight in the revision will likely underperform in As March industrial production declined -0.5% MoM, - 0.9% YoY, CNI (National Confederation of Industry Brazil) capacity utilization in the same month fell from 81.9% (revised down from 82.6%) to 80.9%, following a downward trend that began in 2013 and has been interrupted only by a few monthly spikes. Fig. 5 Brazil PMI In April, PMIs data reversed the expansion trend followed by the index in the previous months. Index Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 PMI Composite PMI Manufacturing PMI Services Source: Pioneer Investments, May 8,

8 In April, PMI data reversed the expansion trend followed by the index in the previous months. HSBC Brazil Manufacturing PMI declined to 49.3 from 50.6, after being stable above 50 for the entire first quarter,, posting the lowest reading since August The Services PMI moved also down from 51.0 to 50.4, while remaining in expansionary territory. However, in aggregate the Composite Index declined from 51 to In the Composite Index, new orders fell to 49.8 from 52.1 in March. Industrial confidence declined sharply in April from 52.5 to 49.2, the lowest level since January is currently above the central bank s target level, although within the tolerance bands (4.5% +/- 2%). The IPCA Consumer Price Index was up 6.28% YoY and 0.67% MoM in April (versus 6.15% YoY and 0.92% MoM in March). In May, the first preview of the IGP-M index (a quite comprehensive indicator of price movements inclusive of wholesale, consumer and construction prices) was much lower than expected growing at 0.06% MoM (consensus 0.39%, prior 0.72%). Producer prices went down -0.28% MoM, led by declines in raw materials (-0.88%) and industrial products (-0.42%); Consumer prices went up 0.64% MoM, pushed by a widespread increase in all items, especially healthcare (1.28%) and food (0.73%). Construction costs went up 0.92% MoM with labour costs growing 1.45% MoM after two months of stability. The central bank raised the SELIC rate on the 2nd of April by 25 basis points to 11%, in line with market expectations and continuing a hiking cycle initiated in April The meeting minutes reinforced the idea that the tightening cycle might be close to an end, by stating that the effects of monetary policy action on inflation might be yet to materialise fully while the recent surge in food inflation might be transitory and should revert in the following months. Domestic activity growth is deemed to be relatively stable, with consumption growing at a more moderate pace than experienced in recent years. Yet, the COPOM ( Committee) met before some less reassuring data were released regarding both inflation and activity, hence potentially giving some room for changes in the policy stance. Next BCB (Banco Central do Brasil) meeting will be on May 28th. We do expect by the end of year rates to be up to 50 basis points, which implies that two 25 basis point hikes might be enacted by then. The current rate hike cycle by the BCB began from an historical low of 7.25% in April 2013 and has now run most of its course. The increases have been motivated by the desire of the BCB to restrain inflation, and have led to much slower economic growth due to high real interest rates that are currently at around 4.50%. The rate hike cycle, while not completely over, is now expected to conclude before the elections scheduled to be held in October Mexico The INEGI (Instituto Nacional de Estadistica y Geografia) Indicator of Economic Activity, which measures the value added by industry, accelerated to 1.7% YoY for the month of February (1% YoY prior), higher than consensus. On a MoM basis, economic activity rose 0.54% vs prior 0.24%: Agriculture rose 6.36% MoM (-2.43% prior), the industrials rose 0.28% MoM (prior 0.63%), while services increased 0.51% MoM (prior 0.04%). 8

9 There were mixed signals from the PMIs report. HSBC Manufacturing PMI inched higher in April to 51.8 (prior 51.7), remaining in expansionary territory and stabilizing after sharp deceleration in previous months, possibly signaling a pick-up going forward. The April IMEF Manufacturing Index, however, disappointed market expectations declining both in the manufacturing and nonmanufacturing component (respectively from 52.7 to 51.1 and from 51.2 to 50.6). Yet the index remains above the expansion threshold. According to the Banamex Survey of Economists for Mexico (as of May 7th) growth projections for 2014 are converging towards 3% YoY (versus 3.4% at the beginning of the year) expectations are stable at around 3.9%. According to the Banamex Survey of Economists for Mexico (as of May 7th) inflation projections for 2014 declined to 3.82% YoY (versus 4.1% at the beginning of the year) expectations are stable at around 3.6%. On the inflation side, CPI data were a bit lower than expected, with CPI declining -0.19% MoM in April (down from 0.27% in March) and 3.5% YoY (down from 3.76% in March). CPI Core was up 0.29% MoM (marginally up from 0.21% in March) but below expectations for an increase of 0.36%. The bi-weekly CPI figures also surprised on the downside, with the data referring to April 30 posting a 3.47% YoY reading. Mexico is converging towards Banxico s target bands. 8% 6% 4% 2% 0% Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 Mexico CPI YoY target lower target centre target upper Source: Bloomberg, data as of May 8, 2014 On April 25th, Banxico left the overnight rate unchanged at 3.5%, in line with expectations. Banxico's risk balance appears to be more tilted towards growth: In the official central bank statement policymakers noted that overall downside risks to economic activity remain, although there has been a marginal improvement in recent data. On the inflation side, inflation is assessed broadly as under control with both core and headline data showing downward trends. Expectations are converging below the 4% level for the short-term and remain well-anchored in the longer horizon. Referring to the central bank s statement, core inflation dynamics remain favorable as readings were actually considerably lower after the highs of January, February and March. In addition, the general inflation index showed downward dynamics, 9

10 partially due to the vanishing of the adverse effects of weather shocks on agricultural prices and the fading of the changes in taxation between the end of 2013 and the beginning of According to the central bank assessment, the risk balance associated with the inflation outlook remained unchanged compared to the previous meeting and current monetary policy should ensure convergence of inflation towards the 3% target. It is therefore unlikely that the Mexican central bank will tighten monetary policy during the year, and more likely that it will wait for a Fed action. Mexico s National Infrastructure Plan According to the plan released at the end of April, the current administration aims to deploy MXN 7,750B (approx. USD 596B) in a highly ambitious set of more than 700 projects, allocating approximately 50% of planned resources in the energy sector. The plan envisages an average participation of the private sector of approximately 37% of the resources planned, differentiated by sector: The biggest involvement of the private sector is expected to be addressed to the tourism and communication & transportation sectors (approx. 60% of total investment), followed by urban development (approx. 50%). Private investment in the energy and water sectors would be lower, respectively 27% and 11% of the planned resources. According to the program ( the impact on growth, if the plan were to be fully enacted, would be to increase potential GDP from the estimated 3.6% YoY growth to 5% YoY over the period. Implementation issues are not to be underestimated, especially because the plan is highly dependent on the success of energy reform. The plan would need to be submitted for secondary legislation and therefore the path to implementation might take some time and be subject to changes. Politically there is much debate in particular with regard to energy reform, which found some strong opposition (e.g. the PRD party) as the proposal would end the state monopoly and control over the sector, opening it to private companies both domestic and international. In addition, the expected involvement of private capital is not negligible and requires some level of profitability to be ensured. Finally, historically, the implementation rate of previous administration reform efforts stands at approximately 60%, due to regulation rigidities/ bottlenecks and project evaluation and management issues. In our view, these issues will need to be addressed in order to ensure the full potential is reached with respect to current reform plans. 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). Fiscal discipline at risk in an election year, especially if activity decelerates (Brazil). Deteriorating confidence and higher rates could further slow the adjustment process towards higher investments (Brazil). Energy rationing is a risk that cannot be ruled out (Brazil). 10

11 Important Information Unless otherwise stated, all information contained in this document is from Pioneer Investments and is as of May 14th, 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: May 21,