EM correlations, charted | FT Alphaville

EM correlations, charted

Presenting… the Bermuda Triangle of emerging markets FX!

Sort of. And one for emerging markets credit!

Those are a couple of fun charts from Goldman Sachs analysts on Tuesday, confirming what’s largely accepted - EMs are high-beta bets which are currently in RoRo mode – although Goldman also point out a few interesting little things via lots of lovely charts.

Such as the power of ‘balance sheet strength’:

The results are mostly obvious but what is striking is that the Asean markets of Malaysia, Philippines, Thailand and Indonesia have effectively zero estimated sensitivity to European sovereign risks. *arches oft-used sceptical eyebrow*

Within FX. GS found the usual story – EM currencies like a bit of risk-on and different currencies have different drivers. CEE currencies are tied to the euro, the Mexican peso is a US growth story and so on.

EM credit, on the other hand, appears to be generally more sensitive to all three risks, with most countries clustering towards the centre of the triangle in Chart 8. From GS:

In this sense, EM credit emerges more as an absolute risk proxy, consistent with the fact that higher yielding credit tends to be in general more sensitive to financial risk of all kinds.

What is somewhat surprising then — the aggregate EM credit index appears to be more sensitive to all three risks compared to any given EM credit (see chart 9).

The full note is in the usual place.

Related links:
BRICs on track – FT Alpaville
beyondbrics – FT’s EM hub
This correlated world – FT Alphaville