Emerging markets week ahead: finding winners in a risk-off environment

Emerging markets and other risk-on investments took a hit last week as economic data from the U.S. and China both showed weakness in the global recovery story.

Better known for risky behavior outside this room than in it.

Markets were first battered by weak employment numbers out of the United States that showed the rebound in jobs was not a one-way trajectory. The disappointment is likely the result of warmer weather over the winter months which beat expectations by around 50,000 jobs in each of the three months. With a shortfall of around 100 thousand jobs, we could see further weakness in April’s numbers before the recovery continues.

China disappointed investors with both trade and GDP data last week. Though GDP growth overshadowed everything else with a lower-than-consensus 8.1% growth, the trade data on Thursday suggested import demand may not fuel global growth as investors had hoped.

Still, pockets of strength across emerging markets exist and may become clearer this week. Economic data is fairly light but some key reports could help pick relative strength across the major regions.

Monday, April 16

Unlike other countries, India reports a wholesale price index to measure inflationary pressures instead of a CPI. The index, published Monday, is forecasted to drop marginally to about 6.65% from the prior month’s 6.95% on an annualized basis. This is still stubbornly high and likely to influence monetary policy going forward. Other economic data suggests that the bank will have little choice but to cut rates to protect a still weak economic rebound.

Brazil’s market got hit hard on Friday after the Chinese 1st quarter GDP report. Chinese demand amounts to 17% of Brazil’s exports and the disappointing report, following equally disappointing trade data that showed weakness in import demand, turned investors bearish on the South American country.

Brazil reports its monthly economic activity index on Monday with expectations of 0.45% growth on an annualized, non-seasonally adjusted basis. This is considerably lower than the 1.44% growth reported last month. Investors may still be in for a surprise to the downside. February retail sales broke a three-month series of growth for a decline of 0.5% from January.

The government and monetary authorities in Brazil are engaged in some fairly aggressive tactics to spur growth which may help the country pick up in the 2nd quarter. If growth in key markets remains sluggish, equity performance could diverge between those companies serving the domestic market outperforming exporters, despite currency intervention to keep exports cheap.

Tuesday, April 17

The Central Bank of India meets Tuesday to decide the policy repurchase rate. While pricing pressures remain high and energy threatens further inflation, other economic data will most likely push the authorities toward a rate cut. Industrial production for January was revised down to 1.1% growth from a previously reported 6.8% annualized. The consensus estimate is for a 0.25% cut in the repo rate to 8.25%. While this might move the markets to the upside in the short-term, the stubborn economy and high inflation may make the gains short-lived. As was seen last year, the Indian market could be the most vulnerable to a second half slowdown.

Wednesday, April 18

The Central Bank of Turkey will meet to decide the one-week repurchase rate, though no change in policy is expected from the current 5.75%. The central bank has tried to counter depreciating pressure on the lira with strong talk on tightening monetary policy but isn’t likely to actually make any bold moves. While economic growth has been good lately, it remains at risk from problems in Europe.

Investors are widely expecting a dramatic move on the part of the Central Bank of Brazil. Consensus is for a 0.75% cut in the benchmark SELIC rate to 9.0%. The authorities have made statements over the past few months implying that interest rates will not be cut further than the current historic low of 8.75%, but a full percentage cut is not out of the question. With rates approaching a low-end target, look for the government to institute more non-traditional methods of protectionism and economic stimulus. Domestic companies supporting local consumption should do well against importers.

Thursday, April 19

Poland remains the stronger of the investable countries within Eastern Europe. Unemployment is still high but employment growth has outpaced real wage growth so companies should see higher profit margins. Producer prices are due out on Thursday and are forecast to drop strongly to 4.8% from last month’s 7.9% annualized growth.

Polish industrial output is also due out on Thursday with consensus estimate for 4.5% annualized growth against last month’s read of 4.6% growth year-over-year. Neighbor Germany has been surprisingly strong given the rest of the problems in Europe so the risk may be to an upside surprise in the numbers out of Poland. Investors are limited in options for the Polish market but could look at the iShares MSCI Poland Investable Market (EPOL, quote).

Russia reports both retail sales and real wage growth on Thursday as well. The market is expecting retail sales to remain strong, increasing 0.3% to 8.0% on an annualized basis. Real wage growth is expected to come down to an increase of 11.6% over the last 12 months. Strong domestic demand and increased spending ahead of the recent elections may set the stage for a surprise to the upside in wage growth. This could put further pressure on the ruble as more monetary tightening would be needed.

Banco LatinoAmericano (BLX, quote) is scheduled to report first quarter earnings before market open. Consensus is for a gain of $0.54 per share against $0.44 per share in the same quarter last year. The bank was established by the region’s central banks to facilitate trade financing to commercial banks and companies in Latin America and the Caribbean. As such, it does not provide retail services. Shares trade for around 8.9 times trailing earnings and pay a healthy 5.0% yield. Though the region is fairly healthy, investors may have cause for concern over slowing global trade and protectionist measures out of the region.

Friday, April 20

Colombia will wrap up the emerging market week with reports on retail sales and industrial production. Industrial production is seen increasing to 3.7% from last month’s 2.4% annualized gain while retail sales are expected to show an increase of 4.7% over the last year.

The Colombian Finance Minister, at the CEO Summit of the Americas this weekend, said that the government was studying measures to stem the rise in the peso. The country’s currency has rallied almost 10% this year, the most of any currency tracked by Bloomberg. The country has repeatedly had problems with currency appreciation as the authorities are clearly less interventionist than neighbors in the region.

A weaker currency could come at exactly the right time this year as the country finalizes negotiations on the free-trade agreement with the United States. Stronger exports, combined with continued domestic demand and high foreign direct investment into the energy sector may drive equities to outperform.

While investors have access to only two Colombian companies, Ecopetrol (EC, quote) and BanColombia (CIB, quote) through ADRs, a more diversified bet is available through the Global X FTSE Andean 40 (AND, quote) which holds positions in Chilean, Peruvian, and Colombian companies.

Disclosure: Long position in AND.