Investors bullish EM, worried about valuations – Deutsche Bank

Elina Ribakova, Chief Economist at Deutsche Bank, notes that most investors believe EM should be well-supported going forward.

Key Quotes

“Inflows into EM funds have continued at a brisk pace, while they may slow going forward, some inflows, particularly retail, are highly autoregressive and anecdotal evidence suggests that cash holdings of asset managers are comfortable. EM-dedicated investors flagged concerns about valuations, especially in credit, where they increasingly focus on relative-value trades.”

“Saudi Arabia’s de-peg discussion was back in focus during the IMF meetings and in our follow up discussions. While most did not believe a de-peg was imminent, due to the fiscal adjustment so far, a few thought market pricing-out FX risk entirely was overly optimistic. Egypt was also back in focus, with expectations of inflation topping off and the authorities attempting to address investors’ concerns about FX backlog. The IMF program is seen as credible in the near term.”

“Turkey appeared on everyone’s radar, especially following the positive surprise of the CBT’s hike on the late liquidity window. Somewhat unexpected following official’s comments during the IMF meetings. There was a sense of worry that positioning was light in Turkey and most of the negative surprises being “known unknown”.”

“In contrast, South Africa was a source of confusion. The nuclear deal was at the top of everyone’s list of concerns even if the authorities sought to assuage investor concerns in recent statements and meetings. While a surprising number of investors were sympathetic to our disinflation call, and even highlighted the turn in SARB’s rhetoric towards a more benign inflation outlook, recent political developments threw macro analysis to the second plan. Investors struggled to understand the road-map for 2017 risks: political changes, local markets downgrade, nuclear deal, or a combination of all of the above?”

“Russia was still perceived as a solid macro-investment case. While Ruble rally is seen as over by most, short of the currently-unlikely sanctions softening, many pointed out that high real rates and lukewarm domestic demand could hinder aggressive depreciation. The 50bps cut by the CBR was largely unexpected, but seen as appropriate. Investors inquired about Russia’s likely next steps towards Ukraine given the recent court ruling on Ukraine's outstanding $3-billion debt to Russia.”

“Ukraine was back in focus, the near-term outlook was not too disturbing. However, elections and debt repayments in 2019 remain a major source of concern. Recent resignation of National Bank of Ukraine Governor Valeria Gontareva was met with disappointment and concern regarding outlook for reforms. The focus will increasingly shift towards fiscal sustainability and political developments that may lead to early elections. Nonetheless, some investors even inquired about local market rates in Ukraine, a question we have not heard in a long while.”