Emerging-Market ‘Blue Sky Scenario’ Possible in 2019, BofA Says

(Bloomberg) -- As emerging markets wrap up a tough 2018, it’s worth noting the positives, according to Bank of America Merrill Lynch.

The silver lining of a selloff in major developing-nation currencies is that current account deficits in some of the most vulnerable countries are disappearing, said David Hauner, a London-based cross-asset strategist at BofAML. He expects Argentina’s deficit to shrink to 2 percent next year from 6 percent this year and Turkey’s to narrow to 2 percent from 4 percent. Those improvements should help spur investor inflows, according to Hauner.

Other factors boosting emerging markets include investor sentiment, oil and U.S. yields. BofAML’s EM carry sentiment gauge is the most bearish since just after Donald Trump’s 2016 election victory -- which proved a good time to buy the dip. Meanwhile, Hauner said he’s constructive on oil prices after they slid into bear territory. And if the last economic cycle is any guide, it may be another six months before the yield curve inverts. In the interim, developing-nation sovereign debt should beat U.S. high-yield debt, he said.

Emerging-Market ‘Blue Sky Scenario’ Possible in 2019, BofA Says

While 2019 may be the first year since 2012 when EM and DM slow in tandem, that didn’t turn out as badly for the asset class. In that year, emerging-market equities rallied 15 percent to top the S&P 500 Index’s 13 percent rally. Developing-nation currencies climbed 5.5 percent against the dollar and sovereign debt posted its third-best annual return since the millennium.

Despite these favorable signs, BofAML cautioned that the outlook for global risk next year is generally poor amid the backdrop of U.S. interest rate hikes and trade tensions.

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