Last week’s IMF Spring Meetings in Washington, D.C., took place in true spring spirit. This was not only true of the actual weather but also of a resurgent interest in Emerging Markets (EM) assets. Investor attendance seemed as high as it has been in a long time. With Emerging Markets debt ranking among the top performing assets year-to-date, investors no doubt wanted to assess whether this has been only a sunny spell or, rather, an indication that the dark clouds of recent years are lifting more permanently.
The meetings dedicated a lot of time to the global backdrop for Emerging Markets. Since the Taper Tantrum episode in mid-2013, the prospect of G3 unconventional policy normalization has been a major drag on the EM asset class. Ongoing weak reflation dynamics, however, prompted G3 central banks to push out the expected normalization path, prompting a corresponding rally of oversold EM assets. Views in D.C., hinted that this supportive policy backdrop is unlikely to reverse soon. Nevertheless, they also revealed a consensus that monetary policy accommodation is reaching its limits and that fiscal policy needs to contribute more going forward. Political constrains, however, cloud the outlook in this connection.
In contrast, investor sentiment regarding EM risks seems to have improved. China remains the focal point in this regard. Concerns over an imminent crisis earlier this year have given way to a more nuanced distinction between near and medium term dynamics. Indications of a cyclical floor in activity in China is seen as reassuring, even if mostly owing to credit growth that stands in conflict with the medium term need to reduce excess leverage. This has added to bottoming commodity prices recently, adding further support for Emerging Markets assets.
At a more idiosyncratic level, most attention went to the contrasting fortunes of Brazil and Argentina’s presidents. Investors actively monitored congressional voting on starting impeachment proceedings (by now approved) against Brazil’s President Rousseff. Brazilian assets rallied strongly ahead of the vote, on the view that a change in the presidency could establish better governability and policy management conditions. While most participants agreed with the latter, they were more skeptical that this marked a definitive turnaround for the credit given the challenging fiscal reforms needed in this regard. In Argentina, there was a more constructive view. Last December, Mauricio Macri took over as Argentina’s President. A lot of debate at the meetings centered on whether a better than expected start for the Macri administration would be sustained over time. Many stressed the need to establish a credible policy track record over time but all agreed that an essential initial condition would be re-opening access to international capital markets. In this sense, Macri’s prospects look better after Argentina successfully issued USD16.5bn in new bonds two days after the meetings. Hope springs eternal but good policy helps too.