Valuation Caution Returns as Emerging Markets Face 2021 Reality
A data graph tracks the movement of stocks on the stock exchange in Germany. (Photographer: Alex Kraus/Bloomberg)

Valuation Caution Returns as Emerging Markets Face 2021 Reality

Rarely, if ever, can a year have started with price levels in emerging markets looking so divorced from the fundamental backdrop.

Rising Covid-19 case numbers and uneven rates of recovery in the biggest of the developing economies underscore a nagging concern that this will be about as good as it gets for stocks, bonds and currencies. Currencies surged to a record earlier on Monday as the dollar slid. The relative strength index on MSCI Inc’s emerging-market equities gauge is above 70, suggesting the market is in overbought territory. The average yield on local-currency debt is less than 20 basis points above the all-time low of 3.46% reached in May.

Valuation Caution Returns as Emerging Markets Face 2021 Reality

Even though the virus is likely to hold back growth, a blended price-to-earnings ratio of emerging-market stocks based on analyst estimates for the next 12 months is at about 15.4, a record high in data compiled by Bloomberg starting in 2005.

The fact remains though that with central-bank stimulus efforts and vaccine roll-outs providing comfort, most investors are confident the rally has further to run. Emerging-market economies will post an average fourth-quarter growth rate of 2.2%, according to a Bloomberg survey, though many see the efficacy of inoculation programs as a key driver for sentiment. The World Bank’s Global Economic Prospects report on Tuesday is set to provide further clues on the pace of recovery.

“Markets are naturally forward-looking, so we have seen a strong rally despite the dark winter with restrictions still in place in many countries,” said Trieu Pham, a strategist at ING Groep NV in London. “We remain constructive going in early 2021, with hopes that we turn a page on the Covid-19 issue and with major central banks remaining dovish.”

Listen: EM Weekly Podcast: Georgia Senate Runoffs, PMIs, Inflation Data

Developing-nation stocks ended 2020 at the highest level in 13 years while currencies edged closer to their 2018 record. Local-currency bonds had their best quarter in more than a decade, with investors staring down more than $17 trillion of negative-yielding debt worldwide.

That’s not to say there aren’t enough events to keep traders on their toes this week. Markets could face headwinds after the New York Stock Exchange said it will delist China’s three biggest telecom companies to comply with a U.S. executive order. Chinese oil majors, including CNOOC Ltd., may be next in line for delisting in the U.S., according to Bloomberg Intelligence.

The Georgia Senate runoffs on Tuesday may also affect sentiment toward risk assets, with the outcome set to decide control of the U.S. Senate and influence the ability of President-elect Joe Biden to advance his legislative agenda. Elsewhere, the Gulf Cooperation Council summit on the same day is seen as a possible step in resolving a crisis that erupted mid-2017 when Saudi Arabia, the United Arab Emirates, Bahrain and Egypt severed trade, travel and diplomatic ties with Qatar.

Among a slew of economic data due this week, Turkey’s year-end inflation rate was in focus on Monday as it leaves Governor Naci Agbal with little choice but to keep access to credit tight well into 2021.

Inflation Data

  • Turkey’s year-end inflation rate exceeded forecasts
    • Consumer prices increased an annual 14.6% in December, more than the median estimate of 14.2% in a Bloomberg survey of 13 economists. That’s also higher than the central bank’s revised October forecast of 12.1%, and nearly triple the target of 5%
    • The lira was the biggest gainer in emerging markets after the Chilean peso in December, trimming last year’s loss against the dollar to 19%
    • Governor Agbal delivered another meaty interest-rate hike late last month, bolstering credibility with investors after he pledged to tighten policy when needed to keep prices in check
  • In Poland, preliminarily December inflation data will probably reflect a slowdown
    • The nation’s central bank is analyzing the impact of potential interest-rate cuts that could take place in the first quarter of 2021, Governor Adam Glapinski said
  • Consumer prices in Ukraine for December, scheduled for Friday, may show a higher reading for the month
  • Colombia’s December inflation data, to be released on Tuesday, is likely to show that price-growth remains subdued
    • While the nation’s peso slipped in 2020, it was still the second-best performer among six Latin American currencies tracked by Bloomberg
  • December inflation data for for much of Asia will also be released this week

PMI Releases

  • Asia’s manufacturing PMIs released early Monday were strong. The simple average excluding China rose half a point. This was despite increased lockdown measures in South Korea and weakness in Chinese PMIs

    • The separately released Caixin manufacturing PMI survey fell 1.7 points below economists’ forecasts
    • This wasn’t enough to halt the rise of the yuan, which strengthened decisively through 6.5 per dollar soon after trading opened
    • The January outlook for the yuan looks good with exporter sales of dollars, clear evidence of seasonal strength, and the possibility of a relaxation in the central bank’s resistance to further appreciation
  • China’s Caixin services PMI is predicted to show a slight increase when it is published on Wednesday
  • India’s services PMIs are due on Wednesday
    • The rupee was one of the worst-performing regional currencies in the second half, though it still gained about 3%
    • While there should be more room for rupee appreciation in 2021, Brad Setser -- who will probably be responsible for the U.S. Treasury report on currencies in the new U.S. Administration -- advocates a more forgiving attitude to countries that normally run a current-account deficit
  • Hungary’s purchasing managers’ index fell to 51.1 in December
    • Poland’s PMI rose to 51.7 from 50.8 in November, while the Czech Republic’s climbed to 57 from 53.9

Other Data

  • Several Asian countries will release foreign-reserves data for December this week
    • Intervention probably continued during the month in much of the region, although at a slower pace than in November
    • South Korea’s data are due on Wednesday. Exchange-rate valuation effects alone should increase reserves to about $440 billion. The won has stuttered a bit in recent weeks as Covid cases have spiked, but the currency still appreciated almost 11% in the second half of 2020
    • Taiwan’s reserves are also due Wednesday. Valuation effects alone would lead to an increase to about $518 billion. The Taiwan dollar continues its pattern of making intraday gains and erasing them into the close. The very high volumes suggest it may only be a matter of time before the authorities yield ground
    • Thailand publishes reserves and forwards data to Jan. 1 on Friday. The baht broke through the key 30 per dollar level when trading commenced in the new year, as the central bank debates further measures to arrest currency strength
  • Taiwan’s trade numbers for December due Friday are expected to show healthy export growth and surplus
  • South Korea’s November current-account figures -- also due Friday -- should remain in comfortable surplus
  • China may release money supply and loans data this week, while the Philippines may release trade figures for November
  • Chile’s economic activity rose on an annual basis for the first time in nine months after the government lifted quarantine measures in most cities

    • Investors will also watch for a potential pickup in December inflation figures later in the week. The peso was the lone Latin American currency to gain in 2020, according to a Bloomberg tracker
  • On Thursday, Mexican policy makers will release the minutes of their most recent meeting, when the central bank left its key rate unchanged

    • On the same day, a reading of December inflation will probably flag a pickup from a month earlier
  • Brazil will release a slew of economic data for December, including trade figures, manufacturing numbers and vehicle sales

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