Brexit – An EM Buying Opportunity?


In the face of the surprise outcome of the British vote on EU membership, EM currency and rates markets have sold off significantly. Currently, the Polish zloty and the Hungarian forint are off between 3% and 4%, the rand by close to 4% and the ruble by 2%. The reaction in Asian currencies is a bit more muted with most currencies off 1% to 2%. The Mexican peso traded through 19 overnight, but has come back a bit since the lows. On the dollar side, the EM sovereign index is down around 0.75% with spreads widening to around 400 – 410 bps.

The market reaction may well be overdone as people factor in the potential for monetary measures to ensure sufficient market liquidity, fiscal initiatives to offset the economic impact of the vote on private investment and the length of time the exit process will actually take. It’s also likely that this moves the Fed out to December at the very earliest. On the other hand, there are obvious longer term risks, not the least of which is the implication for the success of similar Vox Populi movements in other countries in Europe and elsewhere.

Our take away from this event is twofold: (1) Global growth will be slower and DM Central Banks will need to maintain or increase their accommodative policies. This means we are in a lower for longer rate environment. (2) EM will be a longer term beneficiary as this will reinforce a turning point in relative growth rates of EM versus DM leading to a near term buying opportunity for both EM dollar and local currency debt and later EM equity.

We believe this morning’s market reaction is overdone (except perhaps in the case of the CEE) and could provide an interesting buying opportunity into the asset class for those who were looking at the market and missed the first half 2016 rally.

JP Morgan Emerging Market Currency Index: Short-Term Chart

Source: Bloomberg, JP Morgan

JP Morgan Emerging Market Currency Index: Medium-Term Chart

Source: Bloomberg, JP Morgan

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