Biden Win Emboldens Bulls as Emerging Markets Signal Buy

LAGOS (Capital Markets in Africa) — The emerging-market bargain-buyers are in celebration mode. And the party’s not over yet.

The prospect of a Joe Biden presidency checked by a divided Congress has gotten everyone from Eaton Vance Corp. to Medley Global Advisors predicting a fresh boost for risk assets, just a week after the stocks, currencies and bonds of developing nations hit the buffers as the U.S. election approached. BlackRock Inc. says developing-nation assets, which look more appealing in this low-rate world, could benefit from a more moderate leader in the White House. The Biden administration’s policy approach will probably reduce uncertainty, according to UBS Global Wealth Management.

Gains for emerging markets would support the view that the election result is likely to cap U.S. interest rates for longer and weaken the dollar, boosting the debt and currencies of developing nations as they struggle to finance efforts to contain the worst of the Covid-19 pandemic.

Gauges of developing-nation stocks and currencies are both at the highest levels in more than two years after getting whipsawed last month by uncertainty over the U.S. election outcome. Local bonds had their best weekly performance since April last week. The Mexican peso and offshore yuan surged on the prospect of reduced trade tensions.

“A Biden presidency with a Republican Senate is likely the best possible scenario for emerging-market assets and if this outcome holds it should provide a very strong backdrop for the asset class,” said Eric Stein, chief investment officer of fixed income at Eaton Vance in Boston. “Biden should have a less confrontational approach to China and other countries than Trump.”

Asia’s markets will likely outperform their emerging peers as the region’s control of the coronavirus pandemic helps economies recover faster than in other parts of the world where strict lockdowns are returning. China’s October exports unexpectedly accelerated and inflation and credit reports due this week will likely signal stable underlying demand.

“The flows data over the past few months suggest that investors’ purchases of EM assets have been heavily biased towards a handful of Asian countries,” said Nick Stadtmiller, a strategist at Medley Global Advisors in New York. “Asian economies are expected to grow faster than other emerging-market peers in the coming year, and that growth differential has been supportive of Asian markets.”

Still, there are some fragile spots to be worried about. Turkey remains on top of traders’ watchlist after President Recep Tayyip Erdogan fired the country’s central bank governor and his son-in-law unexpectedly resigned as the country’s economy czar. Zambia could become Africa’s first sovereign defaulter since the onset of the pandemic if investors reject on Friday a request to defer interest payments on its $3 billion worth of Eurobonds until April.

In Latin America, Mexico and Peru will decide on interest rates, while an International Monetary Fund mission will arrive in Argentina to negotiate with authorities on a new program.
Turkey’s Surprise

The lira surged the most since 2019 on speculation higher interest rates could be coming after Berat Albayrak resigned as the country’s economy czar and Erdogan dismissed the central bank governor

Erdogan appointed former Finance Minister Naci Agbal to replace Murat Uysal as the central bank chief

The move is unlikely to alter the current trends of inflation, reserves and the lira — if they are not followed by significant changes in policy, according to Goldman Sachs Group Inc.
“Only future monetary policy actions will show if the new appointment once again implies a change in policy and, if so, in which direction,” economists Murat Unur and Clemens Grafe wrote in a report

This may be evident by the Monetary Policy Committee’s next scheduled meeting on Nov. 19

The lira remains the worst performing emerging-market currency of 2020

Mexico, Peru to Decide
Mexico’s central bank will meet on Thursday and while many expect officials to leave the key rate flat, Bloomberg Economics is bracing for a quarter-point cut to 4%. Inflation figures for October, meantime, probably ticked higher from a month earlier. September industrial production, out on Wednesday, is expected to flag a recovery from earlier this year while remaining below pre-pandemic levels. The peso was among the top performers in developing markets last week.

In Peru, policymakers are expected to keep interest rates at 0.25% on Thursday and repeat their plans to keep conditions expansionary, according to Bloomberg Economics. Congress will vote on a motion to impeach President Martin Vizcarra on Monday. Most investors expect the motion to fail just like last month’s attempt, but political uncertainty held back the Peruvian sol last week.

Source: Bloomberg Business News