Argentina is back on the ropes, with the peso falling 8% on Monday to a record low, taking its 2018 decline to 25%. That is a sharp setback for a country that could issue a 100-year sovereign bond as recently as last year, marking a comeback from its 2014 default. Other emerging markets have also come under pressure due to the recent strength of the US dollar and rising US yields.
However, we believe that Argentina's troubles do not herald broader concerns for EM assets:
- Argentina’s particular troubles set it aside from most of its EM peers. The country runs large fiscal and current account deficits – the latter having swelled to –4.8% of GDP in 2017 from –0.3% in 2010 – both of which required external financing. In contrast, the latest quarterly GDP-weighted current account deficit for emerging markets overall looks more manageable, averaging –2.8% of GDP for EMEA, –1.3% for Latin America, and a 1.3% surplus for Asia. Meanwhile, Argentina's history of sovereign defaults, with eight since 1816, means investors are especially sensitive to funding worries.
- Inflation in most EM nations is under control, limiting the need for growth-harming rate rises in many cases. Inflation across EM has been relatively muted, with the GDP-weighted aggregate rate at 3% year-on-year in April, versus an average of 3.9% since 2012.
- Economic growth in emerging markets for 2018 is still set to outpace last year's, maintaining the EM growth lead over developed countries.
So we believe EM assets remain appealing in a risk-on global environment. We are overweight USD emerging market sovereign bonds and we are overweight EM equities.
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