Turbulence and opportunity in EMFX

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Photo by Jeremy BishopSubscribe now11th August 2023This week I talk about the following.Surfing the waves – the recent sell-off in EMFX brings opportunitiesAugust macro developmentsEM Central BanksBRL and HUF – value and carryMonitorsThe post-pandemic macro backdrop lends itself nicely to bouts of mean reversion. The dispersion amongst interpretations of the current outlook is sufficiently wide, and the data is sufficiently volatile and difficult to interpret.With the US data received in July swinging the pendulum towards goldilocks, I concluded the opening paragraph of my H2 outlook with “Is this as good as it’s going to get? I have a feeling it might be.” I suspected EMFX was fragile to swings in sentiment and so it proved. Since then, we’ve had a material retracement, and some of the better stories in EM gave patient investors an entry point. I added short EURHUF first, with a few false starts trying to pick the top, and then followed up by adding short USDBRL. I’ll comment briefly on my choices later in the note. I must stress that I don’t believe these are positions to hold onto for months. When sentiment seems more favourable, I plan to let them go and wait for the pendulum to swing once more.Whilst we can have brief periods of data consistent with ‘goldilocks’ in the US, I don’t think there are many in the market that will have that scenario as their base case for the medium term. Although this is one of the stranger cycles, a recession-free return to the Fed’s inflation target has to be a mid-to-low probability outcome. It seems much more likely that the current sha…