Fed’s Liftoff, China’s Devaluation: EM’s
Perfect Storm
The 13th Seoul International Derivative & Alternative Investment Conference
Seoul, August 26, 2015
Hung Tran
Federal Funds Target Rates During Fed Tightening Cycles
percent, t in months, market expectations estimated from fed funds
futures and Eurodollar contracts
7
t=0 is month of
First Rate Hike: Feb 1994
6
first rate hike
5
First Rate Hike:
June 2004
First Rate Hike: Expected
September 2015
4
3
2
1
0
t-6
t
Median Fed Dots
(6/17/2015)
Market Expectations
(8/20/2015)
t+6
t+12
t+18
t+24
Source: Bloomberg, IIF.
Institute of International Finance
2
Evolution of Atlanta Fed GDPNow real GDP forecast for
2015:Q3
quarterly percent change (SAAR)
4.5
Blue Chip consensus
4.0
Atlanta Fed GDPNow
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
07-Jul
14-Jul
21-Jul
28-Jul 04-Aug 11-Aug 18-Aug
Source: Blue Chips Economic Indicators and Blue Chip Financial
Forecasts.
Institute of International Finance
3
U.S. Trade Weighted Index vs. GDP
percent, yoy, 4QMA (both scales)
5
4
3
2
1
0
-1
-2
-3
-4
00
02
04
06
08
10
12
14
Real GDP
U.S. broad trade-weighted dollar (rhs, inverted)
-8
-6
-4
-2
0
2
4
6
8
10
12
Source: Federal Reserve, BEA, Bloomberg, IIF.
Institute of International Finance
4
Average Hourly Earnings for All Employees: Total Private
percent change from a year ago
4.0
3.5
3.0
2.5
2.0
1.5
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: FRED, IIF.
Institute of International Finance
5
Thomson Reuters/ Core Commodity CRB
level
490
70
440
75
390
80
340
85
290
90
240
95
CRB
USD index (inverted, rhs)
190
140
2005
100
105
2007
2009
2011
2013
2015
Source: Bloomberg, IIF.
Institute of International Finance
6
Total non-oil commodity prices
18941932
19321971
19711999
1999ongoing
Peak year
1817
1951
1973
2010
Percent rise in prices
during upswing
50.2%
72.0%
38.9%
81.3%
Percent fall in prices
during downswing
-54.6%
-43.3%
-52.5%
-
Length of the cycle
(years)
38
39
28
-
Upswing
23
19
2
11
Downswing
15
20
26
-
Source: UN Department of Economic and Social Affairs.
Institute of International Finance
7
Correlation to Oil Very Positive and Unsually High
percent
LT percentile
current 6m correl.
NOKUSD
CADUSD
MSCI ACWI Equities
MSCI EM Equities
US Treasuries 5s 30s
10yr Breakeven Inflation
HY ex-Energy
US High Yield
0
50
100
Source: Bloomberg, Morgan Stanley Research.
Institute of International Finance
8
Headline Consumer Prices
percent change oya
10
8
Emerging Economies
6
Global
4
2
Mature Economies
0
-2
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: IIF.
Institute of International Finance
9
Monetary Policy Rates
percent (both scales)
6.5
Mature Economies
EM Aggregate
6.0
5.5
5.0
4.5
EM excl. Brazil, Russia and
Ukraine
4.0
3.5
Jun 10
Jun 11
Jun 12
Jun 13
Jun 14
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Jun 15
Source: Bloomberg, Datastream, IIF.
Institute of International Finance
10
Chinese Manufacturing and Services Sector
percent of GDP
50
Maufacturing/construction
48
Services
46
44
42
40
38
2000
2005
2010
2015
Source: MRB Partners.
Institute of International Finance
11
Chinese Producer Prices and Industrial Production
percent yoy (both scales)
real IP growth
21
PPI (rhs)
18
15
12
9
6
Correlation: 0.65
3
0
2005
2007
2009
2011
2013
2015
10
8
6
4
2
0
-2
-4
-6
-8
-10
Source: Haver, IIF.
Institute of International Finance
12
Caixin China Output PMI
50=no. of change on previous month, S. Adj.
65
60
55
50
45
Manufacturing
Services
Composite
40
35
2006
2008
2010
2012
2014
Source: Haver, Markit/Caixin.
Institute of International Finance
13
Yuan holding pattern against USD
level
6.45
6.4
6.35
6.3
6.25
6.2
Source: Bloomberg, IIF.
Institute of International Finance
14
China: strong currency weighted heavily on exports
Export growth
percent, yoy
NEER (rhs, inverted)
50
-15
40
-10
30
-5
20
0
10
5
0
10
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
-10
15
-20
20
-30
25
Source: IMF, Haver, BIS, IIF.
Institute of International Finance
15
CNY and EM FX
Index, 8/1/2021=100
130
125
CNY twi
120
EM FX twi
115
110
105
100
95
90
85
80
75
Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 Feb 15 Aug 15
Source: Bloomberg, IIF.
Institute of International Finance
16
SHIBOR
percent
4
3.5
3
2.5
2
1.5
1
0.5
0
Jan 15 Feb 15Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15
Source: Bloomberg, IIF.
Institute of International Finance
17
China New Yuan Loans
billion yuan
2000
1500
1000
500
0
-500
2005
2010
2015
Source: Bloomberg, IIF.
Institute of International Finance
18
Nominal Merchandise Exports
percent change, 3m/3m saar
80
60
Emerging
Economies
40
20
0
-20
Mature Economies
-40
-60
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Haver.
Institute of International Finance
19
World Trade Volume vs. EM Asia Growth
percent, q/q saar, 4-quarter moving average, both scales
20
18
16
14
12
10
8
6
4
2
0
11.0
10.5
10.0
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
World Trade Volume
EM Asia RGDP
10Q1
11Q2
12Q3
13Q4
15Q1
Source: CPB World Trade Monitor, IIF.
Institute of International Finance
20
Asia: Exposure to China
Exports as % of GDP
12
TW
10
8
HK
MY
SG
KR
6
TH
4
ID
2
PH
IN
0
30
35
40
45
50
55
60
Trade Similarity Index
Source: OECD-WTO, UNCTAD, Credit Suisse.
Institute of International Finance
21
Emerging Markets: Total Debt Outstanding
percent of GDP, GDP-weighted average
90
Non-financial corporations
80
Government
70
Households
Financial Sector
60
50
40
30
20
10
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: BIS, IMF, OECD, McKinsey, IIF;*Brazil, China, Czech Republic, Hungary, India, Indonesia,
Mexico, Poland, Russia, Saudi Arabia, South Africa, Thailand, Turkey
Institute of International Finance
22
EM-30 USD-denominated Corporate Debt Outstanding
USD billions, Q1 2015 or latest available; includes financial and non-financial corporate debt
250
200
USD loans
Total: $ 1.97 trillion
USD bonds
150
100
50
0
Source: Bloomberg, IIF.
Institute of International Finance
23
Emerging Market Corporate Earnings vs. World Trade
percent, y/y (both axes); earnings = 12m forward
50
EM corporate earnings
40
World trade (rhs)
30
20
10
0
-10
-20
2010
2011
2012
2013
2014
20
18
16
14
12
10
8
6
4
2
0
2015
Source: MSCI, Bloomberg, IIF.
Institute of International Finance
24
Global Equity Markets
index, 1/1/2014 = 100
135
U.S.
130
Emerging markets
125
Euro Area
Japan
120
China
115
110
105
100
95
90
85
Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15
Source: Bloomberg, IIF.
Institute of International Finance
25
IIF Heat Map Vulnerability Measures vs. EMBIG Spreads
change in EMBIG spreads since mid-May 2015
80
MY
70
ID
CO
60
TR
ZA
CL
50
PE
RU
40
MX
PH
30
PL
CN
HU
20
10
RO
average of domestic, external and
policy vulnerability indices in April*
0
0.3
IN
0.4
0.5
0.6
0.7
*A higher value implies higher vulnerability and vice-versa.
Source: IIF, Bloomberg.
Institute of International Finance
26
Emerging Markets: Fund Portfolio Weights, by Asset Class
% of global bond/equity allocations, dashed line: 2008-15ytd avg.
22
14
13
20
12
18
11
16
14
10
Equity
9
Bond (rhs)
8
12
10
2008 2009 2010 2011 2012 2013 2014 2015
7
6
Source: EPFR, IIF estimates; includes mutual funds and ETFs.
Institute of International Finance
27
Estimates of Net Capital Flows to Emerging Markets
$ billion, dashes indicate incomplete source C
data
Correct
350
Net Flows
Estimates
250
150
50
-50
-150
Flawed
Net Flows
Estimates
-250
-350
2005
2007
2009
2011
2013
2015
Source: Haver, NN Investment Partners, IIF.
Institute of International Finance
28
EM Capital Flows by Residency of Investors
$ billion
Official Reserve Accumulation
" Private" Resident Outflows
Non-Resident Inflows
2000
Net Flows (ex. Reserves)
1500
Net Flows (incl. Reserves)
1000
500
0
-500
-1000
-1500
-2000
1996
1999
2002
2005
2008
2011
2014
Source: IIF.
Institute of International Finance
29
Potential and Differential Output Growth in Mature and
Emerging Markets
percent change oya, period averages
9
8
Emerging Market
7
6
Differential
5
4
3
Mature Market Economies
2
1
0
1996–1998 2002–2004
2006–07
2011–2012 2015–2020
Source: IMF, IIF.
Institute of International Finance
30
Average Annual Growth in Working Age Population
percent, y/y, period average
4.0
2015-2025
3.0
2.0
2005-2015
1.0
0.0
-1.0
Source: UN, IIF.
Institute of International Finance
31
India: Dependency Ratio
dependents as percent of working-age1 population
80
75
70
65
60
World
55
50
India
45
40
1980
2000
2020
2040
2060
2080
2100
Source: United Nations.1-Age 15-64 years
Institute of International Finance
32
Change from peak to trough, EM Assets
percent
Equities
2014-now
-26.2
Taper tantrum
-15.7
Financial crisis
-66.1
Dot-com crisis
Asian crisis
Bonds
-3.4
-10.8
-26.6
-53.1
-33.2
12.9
-3.1
FX*
-9.2
-1.5
-5.2
-5.5
-17.7
*FX: GDP weighted average of 20 EM currencies vis-à-vis USD.
Source: Bloomberg, IIF.
Institute of International Finance
33