A trader talks on the phone while working on the trading floor at an exchange. (Photographer: Michael Nagle/Bloomberg)

To Buy or Not to Buy? Emerging Markets Brace for More Jolts

(Bloomberg) -- Emerging-market prognosticators are divided on whether it’s time to buy.

At the heart of the disagreement is whether expectations for even higher U.S. interest rates will continue to dent demand for riskier assets or if developing-nation economies are resilient enough to withstand any external shocks. While Standard Chartered Plc said last week that high-yielding currencies look “cheap,” Rabobank’s view is that capital inflows to risky assets should remain constrained by a strong dollar.

What You Need to Know About Emerging Markets This Week: Audio

Developing-nation stocks strengthened for the first time in a month last week, while selling in currencies abated. The yield on local-currency bonds climbed for a third week, according to a Bloomberg Barclays index, as emerging markets bond funds posted their second biggest weekly outflow year-to-date in their longest losing run since the fourth quarter of 2016, according to EPFR data.

“The selloff was warranted given how stretched valuations became, and had a variety of plausible triggers,” said Richard Segal, senior analyst at Manulife Asset Management in London. “But prices are now at attractive levels and it’s a good occasion to step back in.”

Read More: Emerging-Market Gains Leave Argentina, Turkey Behind: EM Review

Investors also have to consider the wildcards. Mahathir Mohamad, 92, stunned investors by defeating his former protege, Najib Razak, in last week’s landmark Malaysian vote, just as markets were grappling with Argentina and Turkey. U.S. President Donald Trump’s decision to exit the Iranian nuclear accord has fueled volatility in energy prices and heightened fears of conflict between Tehran and Israel. Malaysia’s benchmark stocks gauge and the ringgit rose after opening lower on Monday, while sovereign bonds fell.

This week, Indian Prime Minister Narendra Modi’s party awaits the results of elections in the southern state of Karnataka.

The selloff in currencies “appear to be larger than justified by the incoming economic data and other market shifts, so despite this challenging price action, we have reiterated both our ‘soggy dollar’ view and a constructive view on emerging-markets assets,” Goldman Sachs Group Inc. analysts including London-based Ian Tomb said in an emailed note.

And here’s something else to consider: the holy month of Ramadan, when Muslims fast from dawn until dusk, begins this week. Trading typically slows in markets across the Middle East during the period.

Political Shock

Most strategists expected Malaysia’s markets to come under pressure when they reopen Monday after Mahathir unexpectedly led the opposition to power for the first time in six decades. Mahathir has proposed scrapping a goods and services tax and reintroducing fuel subsidies, which would be credit negative if they’re done without any offsetting measures, according to Moody’s Investors Service.

A vote over the weekend in the Indian state of Karnataka may give investors insight into next year’s general election when results come on Tuesday. A strong performance for Modi’s Bharatiya Janata Party in the southern state, a stronghold of the Congress Party, would position the prime minister for a second term, according to MUFG Bank Ltd. The rupee has been the worst performer in Asia over the past month amid rising oil prices and a rallying dollar. Exit polls showed a majority in the state may be elusive for Modi’s party.

Policy makers in Brazil, Indonesia, Mexico and Poland will also decide on interest rates this week.

Russia’s parliament will take up the first reading of a bill on counter-measures to U.S. and European Union sanctions next week. The initial draft of the counter-sanctions law was released shortly after the U.S. imposed restrictions on major Russian companies and business tycoons on April 6, sending the ruble into a slide. The text was then diluted as the Kremlin wanted to prevent another round of escalation in tensions with the U.S.

Data Everyone Wants to Know

The perennial conversation among investors in Turkish assets is the country’s current-account deficit. The topic returns on Monday when the data for March will be released. The expectation is for a slight narrowing in the shortfall, but the market remains touchy over President Recep Tayyip Erdogan’s opposition to interest-rate hikes and may react swiftly if the figures prove wider than forecast. Turkey will also release other economic data including industrial output.

Decision, Decisions, Decisions

Brazil is coping with a currency that closed last week at the weakest level in almost two years, complicating a decision due Wednesday on whether to cut interest rates. Seven weeks after the bank signaled it would again cut rates, the real tumbled 8 percent. The bank must now decide whether to keep easing rates, defying the risk of a renewed slide in the real, or to hold fast, gambling that it won’t lose credibility as a result.

Indonesia’s currency, stocks and bonds have been among the biggest decliners in Asia over the past month as the dollar and Treasury yields rose. That may force the nation’s central bank to increase its policy rate as early as Thursday, according to Goldman. While higher borrowing costs would help stem rupiah losses, it may lead to further declines in Indonesian bonds, with the 10-year yield already at a 14-month high. And, if there are subsequent hikes, it will curb economic growth in the run-up to next year’s presidential election.

Indonesian assets were put under fresh pressure on Monday after an explosion at the main police station in Surabaya, a day after the city was hit by a series of bombings at churches.

Mexico is expected to keep rates steady for a second straight meeting on Thursday. The inflation rate declined to 4.6 percent in April, more than expected, despite a steep drop in the Mexican peso. The currency rout has left economists divided about the pace of hikes. The chances of an increase at the meeting in June are about 57 percent, with an 89 percent probability by August.

Peso investors will also be following talks on the future of the $1 trillion North American Free Trade Agreement this week as ministers meet in Washington. Trade representatives are rushing to hammer out a deal this month, before elections in the U.S. and Mexico complicate the schedule. U.S. House Speaker Paul Ryan said that for Congress to vote on an agreement, a deal needs to be made by May 17. Among the key issues still to be resolved are auto content rules, according to a statement by Canada’s Foreign Minister Chrystia Freeland last week.

And in Egypt, whose government gained widespread praise from investors after it implemented painful reforms, the central bank will meet to set monetary policy. While two out of three economist estimates compiled by Bloomberg see policy makers reducing the deposit rate by 1 percentage point to 16.75 percent, the timing probably isn’t right. The yield on the nation’s one-year T-bills have risen this year, the increase in oil prices is creeping into inflation and appetite for risk isn’t what it used to be.

Will They? Won’t They?

As if Argentina didn’t have enough to worry about as its currency plunges to historic lows, it may struggle this week to roll over about $30 billion of short-term notes that are set to expire. The central bank is scheduled to auction notes known as Lebacs on Tuesday in order to roll over securities that mature on Wednesday. The nation faces “disorder” should the maneuver fail, according to JPMorgan Chase & Co. April inflation figures are due the same day.

Read More: Argentine Note Auction Seen as Key Test as Peso Slide Deepens

So acute is Argentina’s crisis that President Mauricio Marci is seeking a credit line from the International Monetary Fund -- the very lender that many in the nation blame for the recession that followed a traumatic default. The peso has lost a fifth of its value against the dollar so far this year, the world’s worst performance.

©2018 Bloomberg L.P.

Bloomberg
Stay Updated With Stock Market News on BloombergQuint