(July 26): Some of the assets most exposed to fears around the spread of the delta variant are luring traders with tempting signals of strength and stability.
Emerging-market corporate earnings have outpaced estimates for the first time in 30 months amid an economic rebound in developing nations. Meanwhile, MSCI’s index of emerging currencies remains up this year, defying the declines seen this month. Stocks fell 2.2% on Monday, erasing this year’s gains as China’s widening-technology-sector crackdown weighed on risk sentiment.
Analysts and investors from ING Bank NV and AllianceBernstein are betting on a return to strong risk appetite following the selloff, and see buying opportunities. With a Federal Reserve meeting on the horizon amid mounting inflation concerns in the world’s largest economy, that may seem like a tough wager. But many emerging-market watchers are ready to make that bet.
“The technical side is very, very supportive in the near term,” ING analyst Trieu Pham said in an interview from London. “We are still some way away from US tapering. All this is good for risky assets and should be supportive for emerging markets.”
Pham added that in the short-term, he sees support for sovereign bonds from developing nations and carry bets.
The recent weakness in emerging-market assets has accompanied a flight to quality that drove US Treasury yields below 1.3%. MSCI’s emerging equity index has crumbled, falling 4.6% so far this month. Still, the index is now floating near oversold territory and has held up against its 200-day moving average.
As investor attention returns to the growth story and fears of the delta variant are put aside, emerging economies may be primed for a takeoff. US growth has been slowing, with Wall Street strategists concerned that economic growth may have peaked in the second quarter. And according to Bloomberg surveys, emerging-market growth is expected to outpace the developed world, 6.6% to 5.4% respectively.
“Equity investors have favoured the US over the last month,” said Morgan Harting, a portfolio manager at AllianceBernstein in New York. “Emerging markets still look to me like that place where investors will find the best-priced earnings growth, and I expect that the continuing rapid pace of vaccination across many EM countries will increase conviction.”
Harting said that he’s specifically betting on electronics manufacturers set to benefit from increased digitalisation, as well as banks with strong balance sheets, energy companies with better governance, and metals, mining and auto sectors.
Meanwhile, even some of the most punished assets may be a solid bet coming up. BBVA strategist Danny Fang says that he’s bullish on Latin American currencies, despite them being among the hardest-hit during the selloff.
“I like Latin American currencies,” said Fang in an interview from New York. “The Colombian peso got close to 3,900, at it seems to be a pretty decent resistance, so I think the peso has potential to recover.”
In particular, he says the rates story looks attractive in Mexico and Brazil, though domestic political uncertainty could translate into more volatility in the currency.
Deputy Secretary of State Wendy Sherman is set to meet Chinese Foreign Minister Wang Yi on Monday (July 26) in the northern port city of Tianjin, as part of a swing through Asia.
Sherman’s visit is the highest level meeting between US and Chinese diplomats since the acrimonious talks in Alaska in March and is seen as the latest effort by both sides to stabilize relations
Hungary will likely raise its benchmark rate on Tuesday (July 27), after hiking last month for the first time in a decade to curb the European Union’s fastest inflation.
The central bank will continue its monthly rate increases until the tightening cycle is seen to slow price growth to near the 3% inflation target next year, Deputy Governor Barnabas Virag said in a Portfolio interview.
The forint has outperformed the majority of its developing-nation peers in the past three months.
Nigeria’s central bank is expected to hold its key rate for a fifth meeting on Tuesday, as it seeks to support the recovery of Africa’s biggest economy.
Ghana will also decide on monetary policy on Monday, and Kenya on Wednesday (July 28).
Elsewhere, all seven economists surveyed by Bloomberg expect Colombia to keep benchmark lending rates on hold at 1.75%, a historic low they have held since September last year.
Rising consumer prices remain the key concern for the central bank.
Economists expect South Korea to report on Tuesday that GDP grew 6.1% in the second quarter from a year ago, after expanding 1.9% in the previous three months. Analysts attribute this to last year’s low base.
The nation will release industrial production data on Friday (July 30).
Taiwan, on the other hand, is expected to report on Friday that GDP growth slowed to 6.2% in the second quarter, from 8.9% in the previous three months. While the island’s exports remain strong, a resurgence of Covid-19 cases from May could have led to the deceleration, analysts said.
Thailand will release June current-account balance data on Friday. The nation recorded a shortfall of US$2.6 billion in May, a seventh month of deficits due to a lack of tourism receipts.
Investors will get the first glimpse of how China’s economy fared in July, with the release of manufacturing and non-manufacturing PMIs on Saturday (July 31). This comes on the back of a cut in the reserve requirement ratio that took effect on July 15.
In Russia, retail sales growth probably slowed in June, as the nation’s health crisis worsened.
Mexico’s non-seasonally adjusted GDP is expected to show an 19.8% gain in the second quarter. The sharp increase can be explained by base effects and a strong services recovery.
Mexico is also expected to report unemployment rates rising in June to 4.5% from 4% the previous month, on Monday. The increase is a warning sign for Latin America’s second-largest economy, which is emerging form the worst contraction in nearly a century.
In contrast, its economic activity likely accelerated in May, up nearly 24% from the previous year in figures to be released on Tuesday.
In Brazil, data due Tuesday will probably show improving trade and current account surpluses and foreign investment in June.
Still, on Thursday (July 29), Brazil is expected to show price pressures edging up month-on-month in July.
The real has been the top performer in emerging markets in the past three months.
On Friday, Chile will report unemployment figures, as well as retail sales, manufacturing production and copper production that will give investors an indication of the strength of the nation’s economic recovery Colombia will also report June unemployment figures on Friday.
What Else to Watch
Traders are watching to see if Sri Lanka will honour its debt commitments as the nation is scheduled to repay US$1 billion on its foreign-currency bond on Tuesday.
Investors have grown increasingly worried about the South Asian nation’s ability to meet its obligations, especially after President Gotabaya Rajapaksa’s administration tightened capital controls. The central bank has said arrangements have been made to settle the debt and Ajith Nivard Cabraal, state minister for money and capital markets, said on Sunday that the country was prepared to make the payment.
The yield on the nation’s 6.85% dollar bonds due 2024 rose to 26.8% this month, the highest since March, before dropping back to 26.3% on Friday.
Malaysia’s parliament will reconvene for five days from Monday to discuss the nation’s recovery plan from the pandemic. This would be the first meeting of the legislative assembly since it was suspended in January, after Prime Minister Muhyiddin Yassin declared an emergency to deal with the Covid-19 outbreak.
Muhyiddin will likely try to raise the debt ceiling to 65% of GDP from 60%. The ability of Muhyiddin to do so will be a test of his control over parliament, after the ruling coalition’s biggest political party withdrew its support this month, according to a note from Credit Agricole CIB.
“If Muhyiddin successfully raises the debt ceiling, it would reduce some of the political uncertainty weighing on the Malaysian ringgit,” Credit Agricole strategists including Hong Kong-based Dariusz Kowalczyk wrote in a note.
The ringgit has lost nearly 2% versus the dollar this month.