EM Policy Rates have Stabilized, but Are Yet to Fall

EM Policy Rates have Stabilized, but Are Yet to Fall

Elle Wu:          I’m Elle Wu, a client portfolio manager here at Thornburg Investment Management.  I am here today with Josh Rubin, one of our equity portfolio managers, to talk about his observations in emerging markets.  Josh, thanks so much for your time today.  We’re three quarters through the year, and a lot of has happened, one of which is the easing cycle.  What are your thoughts around where we are today in the cycle?

Josh Rubin:     My thoughts, or our thoughts within Thornburg, have definitely been evolving as the year has gone, particularly in the emerging markets.  We really had thought there would be room to reduce interest rates by the time we got to the middle and back part of the year.  Largely we are seeing the dynamics in the economy is progressing as we were expecting, but some other moving pieces have cropped up, primarily in developed markets that have changed the trajectory we were thinking about, so because emerging markets were ahead of the curve in raising interest rates in 2021 into 2022, we really didn’t have the issue of inflation rising too fast compared to what central banks were doing; however, because inflation has been a little stickier in developed markets, and now we’ve been beginning to see oil prices rise, we are seeing emerging market central banks being a little more cautious about cutting rates.  Countries like China, Korea, Brazil, Chile, have begun the interest rate easing cycle or certainly have, um, widely announced their expectations that interest rates can be stable, don’t need to rise any more, but we’re just not seeing interest rates come down quite as quickly as we thought, but we definitely expect as we move into 2024 a lot of emerging market central banks have the room to be cutting rates at a much faster pace than people are thinking about for the US or Europe.

Elle Wu:          And that will be a great tailwind for the region.

Josh Rubin:     It really should be.  If you think about some elements of both corporations operating or consumers operating, Brazilian interest rates at 14 percent, Mexican interest rates at 11 percent, those are real challenges, and the companies are navigating it pretty well, but when interest rates fall 300, 400 basis points, just like we see in the US, it’s a real positive for earnings growth, for corporate investment and for consumer spending.

Elle Wu:          You mentioned oil earlier, what are your expectations on oil’s impact on inflation or how we should think about its impact on various economies?

Josh Rubin:     It definitely a mixed bag across emerging markets.  Something I have said before and probably will continue saying is emerging markets we talk about as an asset class, but it’s 25 different countries, and they all have different influences driving them. A number of the countries across emerging markets, have, are pretty neutral or even have tailwinds from rising oil prices, but some do face headwinds, so the countries of North Asia, Korea, Taiwan,   China, even though they are net importers of oil, they are very productive economies with very high energy efficiency, so rising oil prices don’t squeeze them too much.  India on the other hand is, is the biggest Asian country with a real oil import bill that it needs to balance across other economic initiatives.  India has made the choice to import almost half of its oil from Russia which is balancing some of the impact of rising oil prices for them, so we don’t think rising oil prices, squeeze India to the degree that they have in the past when it didn’t sort of have a discounted opportunity to be buying oil, and then when we look across,  sort of, Europe, Africa and Latin America, generally we see, neutral to tailwinds for rising oil prices, which should again juice corporate investment and also be broadly stimulated or at the very least neutral for consumer spending.

Elle Wu:          Another big theme driving emerging markets has been this question around de-globalization. I would love to get your thoughts on that.

Josh Rubin:     I keep waiting for deglobalization to show up. I think what we really continue to see is just the changing dynamics of globalization, so if, if we really say is global trade going away, no signs whatsoever that any of that changes. Are we saying that China’s importance to the global economy changes?  I actually don’t even think we’re seeing that. I think what we’re seeing is the repositioning of trade routes or the repositioning of supply chains but not the elimination of any particular player, and, certainly not, um, dramatic reshoring into developed economies.  We have seen some changes like during the course of 2023, Mexico has become the United States’ largest trading partner, whereas China had been the largest trading partner for a very long time. There is a couple moving pieces in that.  One is some new supply chain capabilities coming out of Mexico.  Another part is the post-COVID consumption of goods in the US has come down, which just means Chinese exports to the US has also come down because there is less demand.  It’s not specifically a China versus Mexico but just a less demand from, for Chinese-made goods, but the other piece is we’re seeing the Chinese companies really rebalance their production bases, so a lot of Chinese companies are building factories across southeast Asia. They are building factories in Mexico even, so it’s not that China has to lose as we rebalance global, globalization, it’s more that just companies are reconfiguring their supply chains, but it’s not just going back to the US.  Foreign direct investment into almost every emerging market is rising, or at the very least, stable in 2023.

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