Russian assets are expelled from global indices as the war continues. Global worries about rising energy prices/inflation persist, but central banks in EMEA/LATAM and Emerging Asia are reacting differently.
The economic and commercial consequences of the Russian military campaign in Ukraine continue to accumulate. increasingly international companies (energy, car manufacturers, distribution, etc.) are cut ties with Russia. We are witnessing the emergence of two-tier exchange rate system, with a significant spread between onshore and offshore rates. the economy is now expected decrease by 10 to 20% in real terms in 2022. Yesterday, Russian stocks were expelled MSCI and FTSE Russell1Indices and Fitch2lower Russia’s sovereign rating down six notches to B (on negative watch), citing a rapid tightening of sanctions and a severe shock to credit fundamentals. It’s only a matter of time before Russia will be excluded from global bond indices – The chart below shows that Russia’s weight in JP Morgan’s sovereign, local currency and corporate bond indices is approaching zero.
Emerging Markets Inflation Risks
An interesting – although most likely theoretical – question is what arrives at russia inflation going forward, as a major recession and a significantly weaker currency (the ruble has lost almost 40% since mid-February) will pull in the opposite direction. We believe that Russia has a good chance of join Argentina and Turkey in the “50+” inflation club In the coming months. Turkey became a member this morning, with the title inflation jumps more than expected in February (+54.44% over one year), and it is now officially higher than Argentine inflation (partly due to the massive devaluation of the Turkish lira at the end of 2021). And there is no signal from the Turkish central bank that it has changed its mind on rate cuts.
Emerging Markets Monetary Policy Response
Worldwide, a sharp rise in energy prices remains a major concern for policy makers – particularly in Europe (including EMEA). Hungary decided not to take any risks after a surprise rise in inflation last month, and recorded an increase of 75 basis points greater than expected in the one week deposit rate this morning. On the other hand, Malaysia remained on hold this morning, despite the mention of inflation risks. Our general observation is that Emerging Markets (ME) rate expectations for the next six months have not moved too much since the beginning of the Russian-Ukrainian war, and the changes that have taken place have not been uniform. Is this status quo destined to change in the future? Stay tuned!
Chart at a Glance: Russia’s Index Weights Decline Rapidly
Source: Bloomberg LP
1FTSE Russell – a UK provider of stock market indices and related data services, wholly owned by the London Stock Exchange (LSE).
2Fitch Ratings Inc. – is an American credit rating agency and is one of the “big three credit rating agencies”, the other two being Moody’s and Standard & Poor’s. It is one of three nationally recognized statistical rating organizations designated by the United States Securities and Exchange Commission in 1975.
Originally published by VanEck on March 3, 2022.
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