COVID | Emerging Markets | Monetary Policy & Inflation
Following promising vaccine results, bullish sentiment over EM is building. To discuss this, we welcomed Dirk Willer, Managing Director and Global Head of Emerging Market Strategy research at Citi onto our latest podcast show. Willer joined Citi in 2005, heading Latin America strategy for nine years before taking the helm of EM strategy in 2014. His team was ranked #1 in an institutional survey as the top strategy team for EM.
Bullish EM Outlook Post US Election and Vaccine News
Dirk sees a strong bullish case for EM post vaccine results. This is particularly so for Latin America, which has been the most sensitive to COVID and global growth prospects. As such, one might expect to see a minor rotation from Asia into Latin America amid the broader shift into EM and risk assets. After an extended period of lacklustre performance, emerging market assets are seen to have potential for a robust bull market. The key risk to this view is a strengthening or stable USD, which will create an environment for fundamentals-based performance dispersion rather than an asset class rally.
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Following promising vaccine results, bullish sentiment over EM is building. To discuss this, we welcomed Dirk Willer, Managing Director and Global Head of Emerging Market Strategy research at Citi onto our latest podcast show. Willer joined Citi in 2005, heading Latin America strategy for nine years before taking the helm of EM strategy in 2014. His team was ranked #1 in an institutional survey as the top strategy team for EM.
Bullish EM Outlook Post US Election and Vaccine News
Dirk sees a strong bullish case for EM post vaccine results. This is particularly so for Latin America, which has been the most sensitive to COVID and global growth prospects. As such, one might expect to see a minor rotation from Asia into Latin America amid the broader shift into EM and risk assets. After an extended period of lacklustre performance, emerging market assets are seen to have potential for a robust bull market. The key risk to this view is a strengthening or stable USD, which will create an environment for fundamentals-based performance dispersion rather than an asset class rally.
Globally, inflation is slowly on the rise after troughing earlier this year. Deflationary forces in developed markets have been muted due to strong income and credit support. Consumption in developed markets has also shifted to primary goods in lieu of select services, something CPI readings are not fully capturing. These factors, in conjunction with supply-side disruptions, will likely translate into stronger inflationary pressures in EM. This is because of their heavier reliance on primary goods consumption and the strong USD environment this year.
Dirk believes the prospect of inflation poses only a moderate risk to EM assets as real rates will likely remain low. However, tail risk remains: inflationary pressures could get out of hand and trigger either a bout of market volatility or a rise in real rates. In such a scenario, EM assets would suffer.
Constructive on CNH, Cautious on Brazil and Russia
Longer term, Dirk is constructive on CNH given China’s structural economic growth and capital market liberalisation. Moreover, the Biden administration is expected to take a multi-lateral approach in its China policy, tempered in tone if not in substance. This will dampen volatility in the medium term.
Dirk is cautious on Brazil despite a temporary reprieve due to central bank intervention. Structural risks include high debt and a breakdown in governance capacity. On Russia, he expects RUB assets to price in slightly higher political risk premium going forward given the outgoing US administration’s unprecedentedly friendly tone towards President Putin.
Top Tips From His Latest Book
We also discussed Dirk’s new book: Trading Fixed Income and FX in Emerging Markets: A Practitioner’s Guide (co-authored with Ram Bala Chandran and Kenneth Lam). The book includes several back-tested strategies and addresses thematic topics such as how EM responds to moves in the dollar or US interest rates. Generally, Dirk has found that global factors provide good indicators for EM as a whole but fare poorly at the EM country level. Dirk’s most robust indicator has been capturing turns in the cycle using growth surprises.
Angela Xu, CFA has had four years of experience investing in macro, emerging markets, and quantitative hedge funds. She holds a BSFS in International Politics from Georgetown University.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)