Summary
The market is bouncing back this morning, despite fat negative tail risks. Some EMs sure look interesting after the recent sell off.
Russia/Ukraine Conflict
The market is bouncing back this morning, following (kind-of encouraging) headlines about “negotiations” between Russia and Ukraine, and the imposition of the new – tougher but not “devastating” – sanctions on Russia. The situation on the ground is extremely fluid and dangerous – which means that (1) there are fat negative tail risks, and (2) the latest sanctions might not be final. As of this morning, military operations and missile strikes in Ukraine were still ongoing. However, some brave souls started to “fade” geopolitics (“pullback Friday”), and are looking around for potential “buys”.
EM and Higher Oil Prices
The first region that comes to mind – especially against the backdrop of higher forecasts for oil prices – is the Gulf. Most countries in the region entered the current geopolitical turmoil in very good fundamental shape, with stronger than expected growth and improved fiscal and external balances. For example, Saudi Arabia is now targeting a fiscal surplus in 2022 – the first in years. A growing rapprochement between the region and Israel helped to remove a major local geopolitical stumbling block.
Brazil Outperformance
Another region which has been hit disproportionately by the latest sell off is LATAM. One regional economy – Brazil – has been a poster child for emerging markets (EM) Fixed Income year-to-date outperformance, which reflected very aggressive monetary policy response and a much better than expected budget outcome for 2021. Today’s release shows that Brazil’s fiscal “fairytale” continued in January, with both primary and nominal surpluses exceeding expectations by a wide margin. Further, the government’s net debt/GDP ratio moderated more than expected to 56.6%. Can Brazil avoid fiscal temptations in the election year? Stay tuned!
Chart at a Glance: Brazil’s Public Sector Debt Trajectory – On the Mend?
Source: Bloomberg LP
Originally published by VanEck on February 25, 2022.
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