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EmergingMarkets Macro and Strategy Outlook: Bad news for commodities exporters?
· Sell deficits, buy surpluses’seemed a winning strategy for much of 2013, following an ancient pattern: whenrisk aversion takes hold, creditors lose enthusiasm for those who need toborrow. But the best guide for investors to discriminate among emergingeconomies changes over time, and now we think ‘sell commodities, buymanufactures’ could end up replacing ‘sell deficits, buy surpluses’. Two of the‘Fragile 5’ – India and Turkey – are essentially exporters of manufacturedgoods. If we’re right about the idea that manufacturing exporters are going tobe in better shape than commodities exporters, the ‘Fragile 5’ might be losingits usefulness now that there has been a degree of current account adjustment. · The end of the commoditiessuper-cycle’ is by now a familiar idea, but it does seem as though itsconsequences have become more visible. Broad-based commodities price deflationseems well-established – notwithstanding the apparent rise in geopolitical risk– and this is causing commodities-exporters to suffer more than theirmanufacturing counterparts. To be sure, exports for EM as a whole are hardlyencouraging, but there is divergence between commodity exporters and the rest. · The export underperformance ofcommodities exporters relative to manufactured exporters has been evident fortwo years now, and is echoed by a general loss of global market share by thisgroup. As a result of these trends, the current account balance of commoditiesexporters has been deteriorating much more markedly than in manufacturingeconomies. In a sense, manufacturing exporters now have some kind ofcompetitiveness-advantage over commodities exporters; there was a hugedivergence in the trend of each group’s terms of trade over the past decade,leading to real exchange rate appreciation for the commodities group. That hasbeen unwinding recently, and may have to continue. · The relative economic weaknessof commodities exporters is also clear from their higher inflation rates andtheir abrupt decline in the efficiency of their investment spending. All thissuggests that, over time, a ‘sell commodities, buy manufactures’ strategy mightbe a theme worth watching. · In the short run however, thereis one big obstacle to implementing such a strategy: commodities exporters haveconsiderably higher real interest rates, on average, than the rest. In acarry-seeking world, we find that EM over-weights are moderate and risk-takingis not excessive. So as long as the carry environment continues there is littlethreat of a technical correction driven by excessive risk unwinds. On thecontrary, the pain trade seems to continue to be lower yields and tighter spreads.In other words: stay long.
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