Biden Era Begins on Bearish Note as Emerging-Market Rally Stalls

(Bloomberg) -- Days after Joe Biden’s inauguration, the $11 trillion rally in emerging-market equities is stumbling.

A rebound from the March rout, which accelerated after Biden’s November election, has turned into a $700 billion loss in market value since Jan. 20. The biggest weekly slump since September for stocks, coupled with rising credit-risk premiums and local-bond yields, contrast with a sizzling start to the year when equities set record after record.

History suggests the trends of early January matter little to the full-year outlook for emerging-market assets, while month-end moves tend to set the tone. 2016 started with a selloff, only to morph into an equity rally in the third week that eventually added $8.3 trillion to market values. In 2018, early gains petered out and paved the way for a bear market.

The following charts suggest momentum may be shifting in favor of the bears.

The benchmark MSCI Emerging Markets Index posted its first weekly decline of 2021 and witnessed the biggest plunge in its valuations since September. The losses came after the gauge hit the “oversold” level of 70 on its monthly relative strength index chart, a threshold that heralded the 2008 and 2018 slumps.

Short sellers are getting more aggressive in calling for declines in emerging-market stocks. They have increased bearish wagers on the iShares MSCI EM Exchange Traded Fund to the highest level since the global financial crisis. Now, one out of every three shares in the fund are borrowed to be shorted, with almost $10 billion riding on the bets.

Late January also saw support from China’s equities fade. Mainland stocks posted the biggest weekly retreat since September, after serving as a key pillar in the emerging-market rebound since March. While the second-biggest economy is posting the world’s quickest recovery from the pandemic, its equity valuations, at 13.4 times projected earnings, hover above their 10-year average of 11 and may bother some investors.

The key shift in investor sentiment around Biden’s inauguration on Jan. 20 was the expectation the dollar may strengthen, at least in the short term. That proved to be the case, and the Bloomberg Dollar Spot Index posted its first gain since September. That led to losses for local-currency bonds in the developing world, where yields rose for a fourth successive week to a two-month high.

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