June 2023 marked the 25th Anniversary of Gramercy! Thank you to our valued investors, trusted business partners and team members without whom this milestone could not have been reached. We are excited for the opportunities we see ahead, and look forward to continuing to deliver upon our mission to have a positive impact on the well-being of our clients, portfolio investments (and their communities) and our team members.


Market Overview

Macro Review

The one thing that everyone fears is stagflation. There was evidence of this with lower-than-expected U.S. 1Q GDP and higher-than-expected Core PCE inflation. The instant reaction was a sell-off in the two-year U.S. Treasury as yields rose above 5% for the first time since November. A second-order effect via a rebound in commodities could support further stagflationary concerns. The Fed’s preferred core inflation measure also rose at a rather brisk pace in March, but the market still rallied as the data was close to expectations. The weak composite PMIs of 50.9, relative to expectations of 52.0, was the lowest reading in four months but almost forgotten about by the end of the week. The details of the report were even worse: the new orders component fell to a 7-month low (48.4), whilst the employment index fell to its lowest since May 2020 (48.0). There was also plenty driving emerging markets this week. Ecuador secured a four-year IMF deal of $4bn, which saw bonds rally. Mexico’s Sheinbaum now leads by 29 points according to latest polling data. The presidential candidate has seen her polling levels decline from 65.4% in December to 60.2%, but the comfortable lead is what matters. Copper made a fresh push $10,000/t as BHP’s offer to buy Anglo-American lent support to the commodity, sector and EM currencies that are correlated with the metal (Chile’s peso). South Africa’s MKP released its manifesto, just as IPSOS polls showed ANC support remaining steady at 40%. Finally, Bank Indonesia raised interest rates by 25bps to 6.25% in a move to stem capital outflows after intervening in FX and selling USD in the prior week. Indonesia’s FX reserves are around $140bn and much higher than they were when they were forced to hike in October, which limited any material downside. 

EM Credit Update

Emerging market sovereign credit (cash bonds) ended the week down -0.4% with credit spreads 1bp wider. Sovereign outperformers were Ecuador, Pakistan and Bolivia, while Ethiopia, Zambia and Ukraine underperformed. Chile’s Banco Estado issued an inaugural AT1 this week, successfully issuing an IG-rated $600m PNC5 AT1 at 7.95% from an orderbook >$2.1bn. One unique feature is that coupon payments are subject to Net Distributable Items that can only consist of prior year net income, given local law prohibits multi-year profit accumulation. This likely increases the risk of coupon cancellation compared to many regional peers that can use multi-year accumulated reserves to support coupon payments even when facing losses or potentially cancelling dividends.

The Week Ahead

The main fixture next week is the Federal Reserve’s FOMC with a decision on Wednesday. Euro-Area GDP ought to signal limited recession risks next week, too. The same amount of focus will be on inflation data as a precursor to the ECB’s decision in June. The other focus will be on Chinese manufacturing PMI data, before the more export-based Caixin PMI release. EM interest rate decisions are due out of Colombia (12.25%), Czech Republic (5.75%) and Pakistan (22%). Other data includes Hungarian and Mexican GDP, followed by inflation releases out of Indonesia, Peru, Poland and Turkey.

Highlights from emerging markets discussed below: Venezuelan opposition unites behind candidate Gonzalez and Ecuador reaches staff level $4bn IMF deal; referendum largely a success for Noboa.

Fixed Income

Source for data tables: Bloomberg, JPMorgan, Gramercy. EM Fixed Income is represented by the following JPMorgan Indicies: EMBI Global, GBI-EM Global Diversified, CEMBI Broad Diversified and CEMBI Broad High Yield. DM Fixed Income is represented by the JPMorgan JULI Total Return Index and Domestic High Yield Index. Fixed Income, Equity and Commodity data is as of April 26, 2024 (late-morning).

Emerging Markets Weekly Highlights

Venezuelan opposition unites behind candidate Gonzalez

Event: The Venezuelan opposition has united behind Unitary Platform (MUD) candidate, Edmundo Gonzalez, including backing from main opposition leader Maria Corina Machado. This follows last week’s decision by the U.S. to issue a wind-down general license (GL44A) to GL44 and open the door for oil companies to apply for special licenses, similar to Chevron’s GL 41. ENI, M&P, Reliance and Repsol are reportedly seeking such licenses. Additionally, the government has reportedly hired Rothschild to begin mapping out Venezuela’s debt stack and holders.

Gramercy Commentary: Successful unification of the opposition behind Gonzalez, a little-known ex-diplomat, is a very constructive development and is a key element for the U.S. government to recognize the outcome of the presidential election scheduled for July 28th. A solidified opposition increases the odds of a narrower election result where Maduro, whose support as a candidate remains in the high single digits, could miscalculate the regime’s ability to control the outcome. The electoral backdrop remains fluid with further room for back-channel negotiations, evolution of the sanctions framework, and momentum towards broader debt resolution.

Ecuador reaches staff level $4bn IMF deal; referendum largely a success for Noboa 

Event: Ecuador and the IMF struck a staff level agreement on a new 48-month $4bn EFF arrangement. The Fund’s press release commended the authorities for reform efforts thus far and a robust plan to strengthen fiscal sustainability. Last weekend, President Noboa won strong backing of roughly 60-70% for nine out of eleven questions proposed in a referendum vote. The approval topics dealt with security measures and the President’s fight against crime while the two rejected proposals with only 30-35% support were related to economic measures, notably labor market flexibility and international arbitration.

Gramercy Commentary: The 4-year IMF deal is a welcomed development and should provide the country with a robust policy anchor and financial support while the referendum results were largely supportive for Noboa. The vote underscored that security issues continue to be very important to Ecuadorians, affording him a strong mandate to continue to execute on these measures and help to offset some of the tougher economic reforms that will be needed under the new IMF program. As of today, Noboa looks well-positioned for the November 2025 presidential election.

Emerging Markets Technicals

Emerging Markets Flows

Source for graphs: Bloomberg, JPMorgan, Gramercy. As of April 26, 2024

For questions, please contact:

Kathryn Exum, CFA ESG, Director, Co-Head of Sovereign Research, [email protected]

Petar Atanasov, Director, Co-Head of Sovereign Research, [email protected]

James Barry, Director, Deputy Portfolio Manager, [email protected]

This document is for informational purposes only. The information presented is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Gramercy may have current investment positions in the securities or sovereigns mentioned above. The information and opinions contained in this paper are as of the date of initial publication, derived from proprietary and nonproprietary sources deemed by Gramercy to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. This paper may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader. You should not rely on this presentation as the basis upon which to make an investment decision. Investment involves risk. There can be no assurance that investment objectives will be achieved. Investors must be prepared to bear the risk of a total loss of their investment. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. References to any indices are for informational and general comparative purposes only. The performance data of various indices mentioned in this update are updated and released on a periodic basis before finalization. The performance data of various indices presented herein was current as of the date of the presentation. Please refer to data returns of the separate indices if you desire additional or updated information. Indices are unmanaged, and their performance results do not reflect the impact of fees, expenses, or taxes that may be incurred through an investment with Gramercy. Returns for indices assume dividend reinvestment. An investment cannot be made directly in an index. Accordingly, comparing results shown to those of such indices may be of limited use. The information provided herein is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation.