Risk Diet’s Controlled Calorie Counting
The main emerging market asset classes had double-digit gains through August, with the MSCI stock and GBI dollar-denominated indices up close to 20 percent, on massive fund redeployment from low and negative return industrial world assets and modestly improved economic data. Commodities and currencies joined the upswing on correction and political risk pauses, as central banks in the US, Europe and Japan signaled status quo monetary easing policies along with hesitation to deepen that direction. Average GDP growth of 3.5 percent should be positive after inflation, which has improved with food price drops added to previous energy ones. In the BRICS these readings are brighter as Brazil and Russia look to exit and South Africa to avoid recession, while China’s deflation and CPI numbers stabilize and India benefits from a good monsoon harvest. In other large markets Korea has experienced global tech recovery, Turkey has entered a period of post-coup attempt relative calm, and Mexico is not so spooked by the trade prospect of a Trump US Presidential victory despite the candidate’s rough short meeting with President Pena Nieto which further dented popular approval. However in parallel with the mainstream universe healing second-tier representatives like Nigeria descended further into economic and financial crisis, as power and foreign exchange rationing continued to deter direct and portfolio investors. It was down almost 40 percent on the MSCI Index, dragging the frontier composite into loss. Chinese statistics show the 6.5 percent growth target on track as solid background despite private investment falls and halting progress on industrial overcapacity and state enterprise slimming. Bank credit’s share of total financing has been steady and geared toward property sector revival. The monetary stance is neutral, while the fiscal one is expansionary, with this year’s deficit estimated at 10 percent of GDP, according to the IMF’s latest Article IV review. Other developing markets have less budget room, but with lower inflation rates may be cut incrementally in the major regions with a few exceptions.
Brazil has been the top rebounder across-the-board with a near 50 percent MSCI advance to date, as President Rousseff was formally impeached during the Rio Olympics and a caretaker business-friendly government was installed to focus on structural reform and fiscal discipline. A long-term cap on budget spending is unlikely without profound constitutional changes, but costly social security programs could be modified and utilities will be further opened to private concession. Former President Lula’s prosecution may invite more supporter street demonstrations, and executives at the state development bank BNDES have also been implicated in far-reaching bribery probes. Judicial investigation is also under the microscope in South Africa, where Finance Minister Gordhan is accused of misusing the Revenue Authority as a possible prelude to dismissal pressed by his ruling party leadership enemies, who want looser purse strings for public enterprises. The pressure has intensified since the African National Congress was battered by opposition groups in August local elections, as its national vote share was down 10 percent to a slight majority. In contrast hard cases such as Venezuela and Ukraine threaten additional chaos, as both may face presidential recall and debt restructuring, on continued local and overseas indigestion after promised anti-corruption and recession servings.
