Research & Insight

Despite the continuing protests in the Middle East and North Africa (MENA), local emerging market bonds remained firm over February. The JP Morgan GBI-EM Global Diversified index returned 1.49% in US dollar unhedged terms. It would have been very difficult to imagine beforehand the extent and pace of change we have witnessed in North Africa and the outcome of the protest is clearly very hard to predict. Rexiter is watching the situation very closely due to the effect and sensitivities this has on the wider emerging markets universe, and in particular commodities pricing. Remarkably all regional returns remained positive over the month, even MENA. Given the extent of the protests, change and uncertainty for Egypt, we think it would be no surprise to our readers that the return from Egypt was negative over the month. However, Egypt fell only 4.7% in February, which we think is light given the extent of the circumstances. Emerging market investors will be pleased that they were more than compensated from returns in commodity producing countries, such as Russia.

Given the unrest in the Middle East and the consequent rise in the oil price, equity markets have been quite remarkably resilient: emerging markets fell by less than 1% in February and the S&P rose. As would be expected, performance by market showed a rather different picture; oil producing nations (Russia, Indonesia and Brazil) all gained whilst big energy importers such as India, Taiwan, Korea and Turkey all lost ground. Markets in the Middle East itself were much more badly hit. Kuwait, Qatar and UAE all experienced falls of more than 10% and the Saudi market fell nearly 20% despite clear support from state funds.

MSCI Asia ex Japan fell 3.9% in February driven by unrest in the Middle East, rising oil prices further heightening concerns about inflation. Brent crude oil surged 14% during the month to $112 per barrel. Meanwhile investors continued to rotate money out of Asia and emerging markets into developed markets. According to Merrill Lynch, emerging markets suffered $21bn in redemptions in the five weeks to end February in contrast to inflows of $21bn into developed markets over that same period as macroeconomic data continued to be positive. These ‘big picture’ drivers were dominant during the month, leading to the largest and most liquid markets to fall the most and profit taking heavier in countries and sectors that had previously done better than others.

The horrific scenes and media reports from Eastern Japan have transfixed the world, and our thoughts are with all those suffering; the almost immeasurable power of nature compounded by the acts of man. We wish for containment, so that the painful process of assessment, healing and recovery can begin. Above all this is a human tragedy.

It will come as no surprise that the singularly most common question we have been asked over the past six weeks is the effect of the Middle East and North Africa (MENA) crisis on local currency emerging market debt prices. The good news for local currency emerging market debt investors is that Egypt aside, which has a less than 0.5% representation in our benchmark, the current participants in this crisis are outside of the investable universe. Further, we anticipate that it is extremely unlikely that political unrest will spread to countries within our universe.