Emerging-Markets’ Prospects Bright, Even If Risks Never Far Away

LAGOS (Capital Markets in Africa) — For all the risks of a year-end cooling-off period, emerging-market backers can’t complain about the lie of the land right now.

From the rollout of vaccination programs in some countries to rising commodity prices and the prospect of a breakthrough in U.S. stimulus talks, there are plenty of tailwinds to justify the buying spree that has sent gauges of developing-nation stocks, currencies and bonds to five straight weeks of gains. Inflows into emerging markets reached a monthly record in November according to the Institute of International Finance and exchange-traded funds last week received the most money since January.

“Low interest rates, the increased conversation about stimulus and a ‘flight-to-quality’ unwind with progress on the Covid vaccine should keep the U.S. dollar dropping, which should be a boost to equities,” said Malcolm Dorson, a New York-based money manager at Mirae Asset Global Investments, whose $1.1 billion Mirae Asset Emerging Markets Great Consumer Fund, which Dorson helps oversee, has outperformed 91% of peers over the past three years, according to data compiled by Bloomberg.

The risks, as ever, are never far away. Renewed U.S.-China tensions cast a pall on the market Monday.

Aside from the continued spread of Covid-19, traders will also be keeping an eye on any signs that the global recovery may be faltering, with many developing economies getting low on firepower to cushion the blow from another shock. Goldman Sachs Group Inc. says the tactical upside in emerging markets may be more muted from here, even as it turns more positive on the 2021 outlook for high-yielding currencies such as the South African rand, Mexican peso and Indian rupee.

Still, the growing conviction that emerging markets are poised for further gains in 2021 will continue to sustain investor interest, according to Citigroup Inc. Central banks, too, may be less minded to cut interest rates as activity picks up in some of the hardest-hit economies. A report on Tuesday may show South Africa’s economy exited its longest recession in almost three decades in the third quarter. Policymakers in Brazil, Chile, Peru and Ukraine are forecast to keep rates on hold this week.

Central Banks in Focus
Brazil’s central bank will probably hold its key interest rate at a record low on Wednesday as the recovery in Latin America’s biggest economy slows
Smaller cash handouts could cause October retail sales figures released on Thursday to lose some steam. But as the economy remains weak, November inflation scheduled for Tuesday is expected to accelerate above 4% for the first time since February. The Brazilian real has been the best performer in emerging markets in the past month

Chilean policymakers will also probably hold interest rates steady on Monday, though they may sound less dovish than in previous meetings, according to Bloomberg Economics
Consumer prices unexpectedly dropped 0.1% in November from the previous month on falling apparel costs and easing food inflation, data released on Monday showed

Peru’s monetary authority is also likely to keep borrowing costs at an all-time low on Thursday and repeat its commitment to stay accommodative, according to Bloomberg Economics

Ukraine’s central bank will probably keep rates unchanged on Thursday amid a strained budget and uncertainty over IMF aid. The hryvnia, the world’s best performer last year, reached the weakest level since January 2018 in November

Serbia will also decide on monetary policy Thursday

U.S.-China Friction
The U.S. is preparing to sanction at least a dozen more Chinese officials over their role in the recent disqualification of Hong Kong legislators, according to two people familiar with the plans
The latest round of sanctions over Hong Kong could be rolled out as soon as Monday, said the people, who asked not to be identified because the measures haven’t been formally announced
Read: Markets Hit as U.S. Sanctions Remind China Tensions Here to Stay

Thailand Speaks
The Bank of Thailand plans to hold a briefing on Wednesday to explain foreign-exchange measures. Thai authorities are among the most vocal in Asia in expressing concern over the strength of their currencies and the impact on exports. The baht has risen about 10% from this year’s low reached in April. The Thai central bank prefers to monitor speculation, especially in short-term bonds, and deregulate offshore investments and foreign-exchange transactions, rather than resort to capital controls, Nalin Chutchotitham, an economist at Citigroup Inc. in Bangkok, wrote in a note. Policymakers relaxed rules on capital outflows in November.

Central banks in South Korea and Taiwan are also taking steps to curb the appreciation of their currencies

Mideast Politics
Middle East stocks rallied on Sunday after Saudi Arabia and Qatar said they were making progress toward ending a three-year-long rift, providing the latest spur to a region being buttressed by a jump in oil prices. Qatar’s Foreign Minister said on Friday his country is “hopeful that things will move in the right direction,” and his Saudi counterpart said he was looking forward to a successful outcome to talks mediated by the U.S. and Kuwait. Elsewhere, Kuwaiti voters replaced more than half of the sitting parliament, in a blow to pro-government forces, women and liberals. The election was held at a critical moment for an economy reeling from lower oil prices, the coronavirus pandemic, and stalled reforms. The Premier Market index of the biggest and most liquid shares in Kuwait declined by 0.4% on Sunday.

Source: Bloomberg Business News