Goldman’s Upbeat Call on Emerging Markets Faces Trial by Data

(Bloomberg) -- If signs of a recovery in industrial activity are the next piece of evidence needed to confirm the recent rally in emerging markets is more than a passing phase, then the next five days could prove to be pivotal.

No fewer than nine major developing nations, including Brazil, India and Russia, are scheduled to release reports on manufacturing this week, while China publishes data on trade, inflation and social financing.

Improved corporate earnings, falling interest rates, signs of progress in the U.S.-China trade talks and an encouraging jobs report helped propel an index of emerging-market currencies to a fifth week of gains through Friday, its best streak since January 2018, while stocks recorded their biggest monthly advance since June. Evidence of a pick-up in manufacturing would provide a fresh spur to the rebound, according to Goldman Sachs Group Inc.

“The next key question is whether there is enough of a stabilization in economic data to justify and sustain the better performance of emerging-market assets, and indeed support a further leg higher,” strategists led by London-based Kamakshya Trivedi wrote in a report, backing high-yielding assets that give positive carry. “We lean towards the glass half-full camp.”

READ: Case for Emerging Markets Intact Even if Sell-Off Is Tweet Away

For all the indications that a revival in risk appetite is gaining momentum, the threat of a downturn remains, according to Fidelity International, which favors hard-currency debt and duration in domestic bond markets such as those of China, South Korea, Russia and Egypt.

“The biggest concern remains the potential for U.S.-China trade talks to run sour, or for the proposed phase one deal, due to be signed this month, to remain underwhelming in nature,” said Paul Greer, a London-based money manager at Fidelity whose developing-nation debt fund has outperformed 96% of peers this year. “We remain skeptical about the potential or any uplift of rebound on emerging-market growth or trade between now and year-end.”

The U.S. and China signaled further progress on Monday in trade talks that could culminate in a meeting between Donald Trump and Xi Jinping later this month.

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To Cut or Not to Cut?

• The Bank of Thailand is set to cut its benchmark rate on Wednesday, with the strength of the baht, Asia’s biggest gainer this year, a headwind to growth, according to economists
  • The Finance Ministry last week lowered its 2019 GDP forecast to 2.8% from 3%. A further reduction in interest rates won’t do much to restrain the baht, a member of BOT’s monetary policy committee said
• Bank Negara Malaysia will probably keep borrowing costs unchanged on Tuesday in its last meeting of the year
  • The nation’s economic growth is expected to remain resilient due to a supportive fiscal budget, while inflation is likely to stay moderate, analysts at Malayan Banking Bhd, including Suhaimi Ilias in Kuala Lumpur, wrote; they now predict no change in the overnight policy rate, compared with a previous call of a 25 basis-point cut. Malaysia last lowered rates in May
  • The ringgit was Asia’s best-performing currency on Friday
• Peru is expected to leave interest rates unchanged on Thursday; policy makers have already said economic growth is accelerating despite domestic political turmoil
• Poland, Romania and the Czech Republic will also probably keep policy rates on hold; Serbia will also decide policy on Thursday
• Brazil’s traders will scan the minutes of the last central bank meeting on Tuesday for clues on the path of interest rates next year. Last week, policy makers enacted a 50 basis-points cut in the Selic to 5% and signaled a same-size reduction in December; it sent a more cautious message about additional easing though. Swap rates rose, lifting the belly of the curve, to account for odds of a shorter-than-expected easing cycle
• The October inflation print due on Thursday will also be on trader radars, as central bank forecasts for prices remain low. Economists forecast annual inflation to decelerate to 2.53%, from 2.89% in September

South African Relief

• The rand outperformed peers Monday after South Africa dodged a rating downgrade on Friday from Moody’s Investors Service, which kept the country’s readings one step above junk territory
• While Moody’s cut the outlook on the nation’s credit rating to negative from stable, investors were relieved that the rating company didn’t follow S&P Global Ratings and Fitch Ratings in lowering the nation’s debt to non-investment grade

Economic Data and Events

• China will probably announce on Friday that exports extended declines in October following additional U.S. tariffs that were slapped in September
• MSCI Inc. is to announce the results of its semi-annual index review Friday, when it may add eligible A shares
  • The benchmark Shanghai Composite Index climbed 1% on Friday amid buying by overseas investors
• PMI data this week will come from the Philippines, India, Russia, Egypt, Brazil, Saudi Arabia and the United Arab Emirates
  • The Polish currency held steady against the euro Monday even as the country’s PMI recorded its largest month-on-month fall in three-and-a-half years
  • Hungary’s forint hovered near a two-month high against the euro after the nation’s October PMI rose to 51.9 from 51.7 in September
• Turkish inflation slowed in line with forecasts
  • Consumer prices rose 8.6% from a year earlier in October, compared with 9.3% in September, according to data released by Turkstat on Monday. After six straight months of undershooting estimates, the result matched the median in a Bloomberg survey of 19 economists
  • The lira was among the best performers in emerging markets last week
• Russia, Hungary, Mexico and Colombia will also release inflation data
• Indonesia reports third-quarter GDP data on Tuesday and the Philippines will release its own on Thursday. Economists predict growth further slowed in Indonesia, while the pace accelerated in the Philippines
  • Economic Planning Secretary Ernesto Pernia said last month Philippine growth likely bounced back to the 6% level last quarter as inflation cooled
  • READ: ASIA REACT: PMIs Show No Economies Escape Trade-War Pain (1)
• Taiwan and the Philippines will report trade data this week. Malaysia reported on Monday its trade surplus in September narrowed amid weak exports.
• Saudi Aramco announced its intention on Sunday to list shares on the stock exchange in Riyadh, in what could be the world’s biggest initial public offering
  • The shares are likely to start trading in December
• Romania’s new government is facing a tight confirmation vote in parliament before it can take over from the administration that was ousted last month

--With assistance from Tomoko Yamazaki and Carolina Wilson.

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Lilian Karunungan in Singapore at lkarunungan@bloomberg.net;Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Justin Carrigan, Paul Wallace

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