China Recovery May Buoy Emerging Markets After Volatile Week

A recovery in the world’s second-largest economy may lend support to emerging markets following a rocky week that saw equities wipe out almost all of their annual gains and the Turkish lira tumble anew.

Data from China due Wednesday is forecast to show a rebound in both the manufacturing and non-manufacturing sectors, supporting the broader backdrop of improving global growth. Meantime, the developing world’s improving corporate outlook may lure investors to buy the dip.

China Recovery May Buoy Emerging Markets After Volatile Week

Last week, MSCI Inc.’s developing-nation stock index slumped amid declines in Turkey, Argentina and China. A selloff in Turkey’s lira sent emerging-market currencies to their fifth loss in six weeks, and dollar bonds also edged lower. The weakness is encouraging stock picking in some developing nations that are poised to rebound. Strategists at Goldman Sachs Group Inc. tout attractive valuations in South Africa and Russia, while others favor China.

Exchange-traded fund investors also remained committed to the developing world, adding money in the longest streak in over two years even as risk assets took a downturn.

“The pickup in U.S. yields, the slightly stronger U.S. dollar and Europe’s hapless vaccination rollout have hurt EM, but valuations are again looking interesting in China technology,” said Hasnain Malik, head of equity strategy at Tellimer in Dubai. “For those prepared to look beyond Covid disruption, commodity exporters and tourist destinations offer great opportunities.”

Listen to the EM Weekly Podcast: Quarter-End Fund Flows, FTSE Russell Decision

One of the lingering questions for emerging-market investors is whether the meltdown in Turkey worsens or spills over into other countries. So far, the contagion has been limited. There’s also the ongoing drama in the Suez Canal: the Ever Given container ship has been partly refloated, helping oil pare losses.

What to Watch

  • Chile’s central bank is expected to leave its key interest rate on hold Tuesday while keeping a dovish tilt
  • Kenya’s central kept its key rate unchanged for a seventh meeting on Monday as the country reports increases in Covid-19 cases and inflation sits at a 10-month high

Key Events and Data

  • FTSE Russell Decision

    • FTSE Russell will announce Monday whether Malaysia remains in its World Government Bond Index after putting the nation on a watch list for potential exclusion two years ago. Since then, the central bank has stepped up measures to address investors’ concerns on market liquidity after a ban on trading of non-deliverable forwards in 2016

      • Malaysian local bonds have lost almost 7% this year in dollar terms
    • The bond index will probably confirm China’s inclusion, including details on the country weight

      • Chinese bonds are the only gainers in emerging Asia so far this year with a return of nearly 1% in dollar terms
  • Malaysia reported on Monday a trade surplus of 17.9 billion ringgit ($4.3 billion) for February, beating estimates
  • China will publish gauges of manufacturing service activities for March on Wednesday while South Korean data on February industrial production is also due

    • This will be followed on Thursday by Caixin China manufacturing PMI; similar factory gauges from South Korea, Taiwan, Malaysia, Indonesia and Thailand also come due the same day
    • “China’s PMIs likely rebounded after the seasonal factors during the Lunar New Year period wore off,” according to a note from Australia & New Zealand Banking Group Ltd
  • Thailand will report on Wednesday its current-account balance for February; it has been in deficit the previous three months
    • The baht is the biggest loser among emerging Asian currencies in the past three months
  • India also reports on Wednesday its current-account balance for the fourth quarter of 2020. The balance has turned into a surplus for three straight quarters
    • The rupee is the sole gainer in Asia so far this year
  • South Korea will post March trade figures on Thursday, serving as a barometer of the global recovery
  • March inflation figures will be kicked off by Indonesia on Thursday, followed by South Korea on Friday
  • Russia, Botswana and Mauritius all report fourth-quarter GDP figures
  • Traders will monitor Chile’s unemployment, retail sales and copper production figures on Wednesday, as well as a reading of economic activity on Thursday

    • Bloomberg Economics expects activity to linger below last year’s levels
  • In Brazil, traders are already looking past the central bank’s guidance and asking for more rate hikes as the pandemic worsens
    • They’ll watch unemployment data for January and primary budget balance data for February on Wednesday, which may offer clues on the economic and fiscal outlook
    • Industrial production numbers for February and March trade balance figures will be released on Thursday
    • The real is the worst-performing currency in emerging markets this year
  • Peruvian CPI probably slipped in March as lower food inflation offset higher energy inflation, according to Bloomberg Economics
  • A reading of Argentina’s January economic activity, scheduled for Tuesday, will probably show a partial rebound continuing from earlier in the pandemic

©2021 Bloomberg L.P.

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