Understanding the changes in the US key for EM managers
Donald Trump’s presidency began with a blitz of executive orders, including actions relevant to emerging markets (EM), but the effect on financial markets was limited. US Treasury yields were slightly higher over the week, whilst the US dollar was, in aggregate, slightly softer.
In an EM context, Trump’s order to begin work on the Mexican border wall and his cancellation of a planned meeting with the Mexican President were the focal points. Despite these aggressive actions, Mexican assets were actually stronger over the week, with the currency performing particularly well, appreciating by 4%.
Turkey also remains in the spotlight. The central bank responded to FX weakness by raising interest rates by 75bps. This was at the low end of market expectations, and certainly does not represent a monetary policy regime shift. In the short term, however, it has succeeded in stabilising the currency.
The new issuance market was quieter after the previous week’s issuance; while recent issuance from countries such as Dominican Republic and Argentina have been unspectacular post issuance, we continue to believe in these stories over the medium term.
It is important to consider risk and positioning in response to events in the US above all.
While we continue to examine idiosyncratic stories as investment opportunities in the asset class, it is important to consider risk and positioning in response to events in the US above all. I believe we are experiencing a rewriting of the rules of globalisation and the ‘Pax Americana’; it is crucial for us to understand the implications of this as EM managers.
January has actually not been a decisive month to set the direction for markets in 2017. However, Trump’s first political initiatives adhere to the populist, protectionist and nationalist playbook that got him elected. Battle is yet to be fully engaged on the issues this creates for financial markets.
In February, beginning with the Federal Open Market Committee meeting on the 1st, we expect more focus on the Fed’s response to potential fiscal expansion. We expect to see rate increase expectations in the US rise. US foreign policy and trade intentions towards China, Mexico and Russia will also be revealed.
Generally, we sense the market is underestimating the “America First” intentions of the new administration.
Download article: Market direction remains uncertain
A pick up in EM sovereign issuance highlights ongoing investor demand for higher yields
By David Dowsett, published 25 January 2017 (2 minute read)
Speculation about the policy intentions of President elect Trump continues to dominate financial markets
By David Dowsett, published 18 January 2017 (2 minute read)
We expect the same financial market trends that have been in place since Trump’s election to continue
By David Dowsett, published 12 January 2017 (2 minute read)
This document is issued in the United Kingdom (UK) by BlueBay Asset Management LLP (BlueBay), which is authorised and regulated by the UK Financial Conduct Authority (FCA), registered with the US Securities and Exchange Commission, the US Commodity Futures Trading Commission (CFTC) and is a member of the National Futures Association (NFA). Past performance is not indicative of future results. All data has been sourced by BlueBay. To the best of BlueBay’s knowledge and belief this document is true and accurate at the date hereof. BlueBay makes no express or implied warranties or representations with respect to the information contained in this document and hereby expressly disclaim all warranties of accuracy, completeness or fitness for a particular purpose. This document is intended for “professional clients” and “eligible counterparties” (as defined by the FCA) only and should not be relied upon by any other category of customer. Except where agreed explicitly in writing, BlueBay does not provide investment or other advice and nothing in this document constitutes any advice, nor should be interpreted as such. No BlueBay Fund will be offered, except pursuant and subject to the offering memorandum and subscription materials (the "Offering Materials"). If there is an inconsistency between this document and the Offering Materials for the BlueBay Fund, the provisions in the Offering Materials shall prevail. You should read the Offering Materials carefully before investing in any BlueBay fund. This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product in any jurisdiction and is for information purposes only. No part of this document may be reproduced in any manner without the prior written permission of BlueBay Asset Management LLP. Copyright 2017 © BlueBay, the investment manager, advisor and global distributor of the BlueBay Funds, is a wholly-owned subsidiary of Royal Bank of Canada and the BlueBay Funds may be considered to be related and/or connected issuers to Royal Bank of Canada and its other affiliates. ® Registered trademark of Royal Bank of Canada. RBC Global Asset Management is a trademark of Royal Bank of Canada. BlueBay Asset Management LLP, registered office 77 Grosvenor Street, London W1K 3JR, partnership registered in England and Wales number OC370085.
Published February 2017