- July was a challenging month for emerging market debt
- Political developments weighted on sentiment
- Investec’s topic of the month: Putin staying put – an update on Ukraine
July proved a more challenging month for emerging markets as geopolitical tensions came back to the fore after the tragic downing of flight MH17 over eastern Ukraine. The US government had already announced fresh sanctions before the tragedy, but the incident and Russia’s subsequent reaction prompted Western governments to launch a fresh round of sanctions targeting specific sectors of the Russian economy. The souring sentiment and deteriorating economic outlook led to a sell-off in Russian assets, and forced the central bank to raise interest rates 50 basis points, to 8%, in a bid to stem ruble weakness.
In its latest emerging markets debt indicator, Investec AM highlights other more positive developments elsewhere; reformist candidate, Joko Widodo, secured victory in the Indonesian presidential elections. The new Indian government unveiled its first budget, promising a significant reform programme. More negatively, but in line with expectations, South Africa had its credit rating downgraded and Argentina entered a technical default after refusing to pay the holdouts.
Global macro data remains generally encouraging. US second quarter growth surprised to the upside and the Chinese economy expanded in line with its government target. Moreover, the latest Chinese manufacturing purchasing managers’ index (PMI) hit an 18-month high. The top performing currency was the Indonesian rupiah, helped by Joko Widodo’s election victory. Stronger exports helped boost the Thai baht and the Nigerian naira also performed well. As discussed, the Russian ruble sold-off and it was the worst performing currency in the index. The Hungarian forint and Chilean peso were also relatively weak as their central banks eased rates over the month.
Given its interest rate cut and worsening growth outlook, the top performing bond market was Chile. The Philippines and Indonesia also posted solid returns over the month. Given the sell-off in Russia, it was by far the weakest bond market. Colombian and Turkish bonds also lagged their peers.