The Emerging-Market Rally Is Starting to Stir Longevity Doubts
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 ofvaccination programs in some countries to rising commodity prices and the prospect of a breakthrough inU.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 monthlyrecord in November, according to the Institute of International Finance.
“Low interest rates, 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 billionMirae 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. Aside from the continuedspread of Covid-19, traders will 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. Policy makers 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
- Annual inflation data for November, to be released on the same day, will likely show little change from the month before
- The Bank of Thailand plans to hold a briefing on Wednesday toexplain 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. Policy makersrelaxed rules on capital outflows in November
- Central banks inSouth Korea andTaiwan are also taking steps to curb the appreciation of their currencies
Middle East stocksrallied 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 theright direction,” and his Saudi counterpart said he was looking forward to a successful outcome to talks mediated by the U.S. and Kuwait
- The Premier Market index of the biggest and most liquid shares in Kuwait declined 0.4% on Sunday
Data and Events
- China is due to release trade data for November on Monday as well as its foreign reserves
- “The strong recovery in Chinese exports experienced over recent months is at risk of tapering as resurgent Covid-19 infections force some of its main trading partners into lockdown again,” Prakash Sakpal, a senior economist for Asia at ING Groep NV in Singapore, wrote in a note
- Chinese consumer and producer inflation data are due on Wednesday. TheCPI could drop below zero in the coming months amid a slump in pork prices, while factory prices are already in deflation
- China may also release a slew of data on money supply, credit and foreign direct investment
- The yuan is among emerging Asia’s best-performing currencies this year
- “South Africa’s lockdown was one of the most draconian in the world, resulting in a huge contraction in growth in the second quarter,”Bloomberg Economics said. “The easing of containment measures has since supported a recovery in output”
- The rand has been the top emerging-market gainer after South Korea’s won in the past three months
European Union heads of state will meet on Dec. 10 to discuss a multi-annual budget and emergency coronavirus stimulus measures that have been held back by a Hungarian and Polish veto over efforts to tie spending to upholding democratic standards
- Implied volatility in the forint and the zloty has risen in the run-up to the meeting
- Russia said more than 2 million doses of its Sputnik V vaccine will be ready for use this week
- October industrial production figures, to be released on Friday, will probably add to signs that activity is recovering. The Mexican peso is the top performer in emerging markets this quarter
— With assistance by Karl Lester M Yap, Aine Quinn, Alec McCabe, Marton Eder, Robert Brand, and Adrian Krajewski
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