Emerging-Market Rally May Hinge on Stimulus. Just Not Too Much
dStock Figures Displayed at the Philippines Stock Exchange (Photographer: Taylor Weidman/Bloomberg)

Emerging-Market Rally May Hinge on Stimulus. Just Not Too Much

(Bloomberg) -- Emerging markets will again be looking to central banks to provide the next leg-up in a rally that’s making it the best September so far for stocks and currencies since 2013.

That’s assuming there’s no conflagration between the U.S and China over trade, and no panic over the slump in Saudi Arabia’s oil production, though the oil’s record spike and weaker-than-expected economic data from China weighed on assets on Monday in Asia trading. The Federal Reserve and Bank of Japan decisions on Wednesday and Thursday will be key to sentiment, not forgetting interest-rate decisions in Brazil, South Africa and Indonesia.

“Continued easing in the context of growth stabilization would likely be a very compelling setting for emerging markets,” said Morgan Harting, a New York-based money manager at AllianceBernstein, which manages $581 billion. “However, to the extent central banks deliver more stimulus than expected because growth is worse than expected, it would be hard to see emerging-market assets delivering very strong returns.”

Developing-nation stocks, as measured by a MSCI index, climbed for a fourth week to break above their 200-day moving average on Friday, heralding further gains, though oil-related news may slow any advances. Meantime, a gauge of emerging-market currencies approached its 100-day average after advancing 1.6% since end-August. The European Central Bank said Thursday it would restart quantitative easing.

Emerging-Market Rally May Hinge on Stimulus. Just Not Too Much

“While much of the chatter will be about the Fed, more and more emerging-market investors are likely to pick up on this and reduce underweights,” Harting said. “To the extent we start to see greater evidence of stabilization in EM activity and the forward-looking earnings outlook, I think EM could begin to outperform meaningfully.”

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Oil

  • While global oil prices surged the most on record on Monday, some analysts are expecting the ripple effect on equities and currencies to be short-lived
    • “Based on what I know, this is a short-term one-off event; I certainly would not run out and make any major decisions based on this”, according to Brian Barish, chief investment officer at Cambiar Investors LLC in Denver

Rate-Cut Debate

  • Brazil’s central bank is expected on Wednesday to cut interest rates by half a percentage point to an all-time low of 5.50% to support growth
    • Economists surveyed by Bloomberg predict the Selic rate will end the year at 5%
    • The real was the worst performing emerging-market carry trade currency in the past month after the Hungarian forint
    • Brazil’s Senate will vote this week on a landmark pension overhaul bill, a key step for investors betting on structural reform in Latin America’s biggest economy
  • South Africa’s policy decision on Thursday has analysts and the market more divided than usual. Just three out of 14 economists in a Bloomberg survey predict the central bank will lower its benchmark rate by 25 basis points to 6.25%, with the rest forecasting a hold. Yet forward-rate agreements are pricing a 68% chance of a 25-point cut
    • A stronger rand and inflation below the mid-point of the target range would bolster the case for easing, making Wednesday’s inflation print more significant than usual. Consumer-price growth probably quickened slightly to 4.2% in August, from 4%
  • Indonesia’s central bank is expected to cut its key rate for a third consecutive time, while policy makers in Taiwan will probably hold the rate
    • Indonesia’s bond market has attracted around $2.2 billion foreign money so far this quarter, higher than the previous three months with cumulative inflows of $1.5 billion
  • Ghana’s central bank will also probably keep its benchmark rate unchanged

Economic Pulse

  • China’s industrial production and retail sales slowed in August, data on Monday showed, boosting the odds for further stimulus
    • Industrial output rose 4.4% from a year earlier, versus a median estimate of 5.2%. Retail sales expanded 7.5%, compared to a projected 7.9% increase. Fixed-asset investment slowed to 5.5% in the first eight months, versus a forecast 5.7%
    • China will announce its September loan prime rate for the 1-year and 5-year tenures, following the unveiling of the new benchmark lending rates in August. Consensus is that the People’s Bank of China will announce a five basis-point reduction to both tenures
  • U.S.-China trade tensions continue to bite into exports of Asian economies, with Indonesia recording its 10th consecutive month of decline, according to data released on Monday
    • Taiwan’s export orders are also expected to fall
    • Thailand also releases its data for last month, with July seeing its first positive growth print following four months of decline
  • The Philippines publishes July overseas remittances and August balance of payments figures
  • Argentina’s gross domestic product data due Thursday will probably show the nation remained mired in a recession during the second quarter. A jobs report the same day may also flag an increase in unemployment for the same period. On Friday, Argentina’s will release its budget balance report for August, after a month of politically triggered market turmoil
    • The next tranche under the International Monetary Fund’s $57 billion Argentina bailout risks being delayed to after the presidential elections in October, the Financial Times reported, citing people with knowledge of the talks
  • Peru publishes its July economic activity index data on Monday. A positive reading would support expectations for improved growth in the second half
  • Traders will watch Poland’s inflation data for August on Monday, followed by last month’s wages and employment statistics on Wednesday, industrial output and PPI on Thursday, and retail sales on Friday. Poland will also hold its second and last switch-bond auction for the month on Thursday.

©2019 Bloomberg L.P.

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