11 Feb 2016
Commodity risk to Asian FX - Nomura
Research Team at Nomura, suggests that there will be a more significant impact on emerging economies than advanced ones and asymmetries are likely, where oil exporters suffer more than oil importers benefit.
Key Quotes
“Although the length and depth of the commodity price slump is difficult to determine given supply, demand and political factors, the other uncertainty is if and when this may trigger potential credit events within EM.
Overall, Nomura’s desk analysts believe there is limited risk of a significant default in Asia and EMEA, while the backdrop in LatAm looks to be more challenging. Some of the rationale for why there may not be a credit event even if oil prices were to fall further towards USD20/bbl (average for 2016) is because of common broad back-stops including potential financial sector loans, sovereign assistance and asset sales.
That said, energy-related credit concerns will only rise if oil/commodity prices continue to fall. In addition, we would not underestimate the contagion risk to broad EM if there is a significant local default given greater global financial linkages, as EM markets experienced recently from Russia’s financial market pressures in December 2014. Indeed, we estimate that EM equity mutual fund AUM at USD 1.5trn is equivalent to 43.8% of MSCI EM market capitalization compared with 30% in 20081; hence the indirect financial market implications to Asia are significant. This can be observed in the strong relationship between global EM and specific EMEA/Latam/Asia dedicated funds’ weekly net flow data.
Given other challenges in Asia this year from China macroeconomic/FX depreciation risk, Nomura’s forecast of USD strength in G10, risk of more pro-growth monetary policy in Asia, and local idiosyncratic factors, our bias remains to be broadly long USD/Asia with some relative value in long INR, MYR and PHP.”
Key Quotes
“Although the length and depth of the commodity price slump is difficult to determine given supply, demand and political factors, the other uncertainty is if and when this may trigger potential credit events within EM.
Overall, Nomura’s desk analysts believe there is limited risk of a significant default in Asia and EMEA, while the backdrop in LatAm looks to be more challenging. Some of the rationale for why there may not be a credit event even if oil prices were to fall further towards USD20/bbl (average for 2016) is because of common broad back-stops including potential financial sector loans, sovereign assistance and asset sales.
That said, energy-related credit concerns will only rise if oil/commodity prices continue to fall. In addition, we would not underestimate the contagion risk to broad EM if there is a significant local default given greater global financial linkages, as EM markets experienced recently from Russia’s financial market pressures in December 2014. Indeed, we estimate that EM equity mutual fund AUM at USD 1.5trn is equivalent to 43.8% of MSCI EM market capitalization compared with 30% in 20081; hence the indirect financial market implications to Asia are significant. This can be observed in the strong relationship between global EM and specific EMEA/Latam/Asia dedicated funds’ weekly net flow data.
Given other challenges in Asia this year from China macroeconomic/FX depreciation risk, Nomura’s forecast of USD strength in G10, risk of more pro-growth monetary policy in Asia, and local idiosyncratic factors, our bias remains to be broadly long USD/Asia with some relative value in long INR, MYR and PHP.”