Societe Generale’s strategist Benoit Anne remains “generally bullish” on emerging markets fixed income, but believes that in some markets the monetary policy overpricing “suggests that local front-end rates should correct upward.”
In his opinion, this is the case in Mexico, where the local yield curve prices in 25 basis points of rate cuts in the next 12 months.
“The local market has responded sharply to the change of language bias on the part of Banxico but we think that this is overdone,” Anne said.
“In Poland, we also believe that the local curve has overshot the magnitude of rate cuts in the pipeline in a significant way,” he added.
Some analysts have said that a recovery in Polish growth will be stronger than currently anticipated and expectations of deep interest rate cuts might be overdone.
Societe Generale’s baseline scenario expects 50 basis points in rate cuts in Poland, whereas the yield curve prices in around 88 basis points.
In the Czech Republic, the market prices in a policy rate that would fall into negative territory, “which is not a consideration,” Anne said. “The next step on the policy front will indeed likely be direct FX intervention but the CZK (Czech crown) first needs to move closer to the 25.00 threshold.”
UNDERPRICED RATE CUTS
There are also cases in which the markets underestimate the potential for rate cuts.
In Hungary, the central bank cut the policy rate again this week, and “some sizeable cuts” are already priced in the local curve, Anne said.
“But this may not be enough in view of the forthcoming change of leadership at the helm of the central bank,” Anne said.
“The new management may indeed pick up the pace of easingin the period ahead, and cut the policy rate to below 4%.”
In South Africa, the outlook for monetary policy easing “is not that clear-cut,” but the curve now prices in modest hikes in the interest rate over the next 12 months, “while a rate cut over the next few months is a real possibility,” he said.
“Likewise, the Chilean local curve now prices in hikes, which we have serious doubts about,” Anne added.