‘EMERGING MARKETS’ VOLATILITY STILL HIGH’
Risks from stronger US dollar, trade tensions, tighter liquidity and political turmoil despite July gains, say analysts
DON’T be fooled by this month’s gains: the causes of emergingmarket turmoil haven’t gone away, according to investors including Fidelity International and Amundi Asset Management.
Developing-nation debt is heading for the first monthly gain since March and stocks are set for the first advance since January after a sharp sell-off in the second quarter made valuations appealing.
Carry-trade investors will have their first positive return in four months as emerging currencies close the month with a small loss.
The ray of hope may not last long. The risks posed by a stronger US dollar, escalating trade war, tighter liquidity by central banks in rich nations and political risks in various developing nations are likely to weigh on emerging-market assets in coming months.
“We might see another correction between now and October,” said Zsolt Papp, a client portfolio manager at JPMorgan Chase & Co’s asset management unit, which oversees US$1.7 trillion (RM6.91 trillion).
“If it is stabilisation, we’re in early stages of it. There is still a tail risk that volatility will stay high.”
The yield on emerging-market hard-currency debt rose to its highest level in more than two years on June 19, enticing three consecutive weeks of flows into developing-nation debt funds, according to Bank of America Merrill Lynch, citing EPFR data.
This month was an exceptional month because bond redemptions, coupons and amortisations meant emerging-market funds were flush with cash as new issuance slowed to the lowest level since 2015, leaving them with little alternative but to stock up in the secondary market, according to Fidelity International.
The amount of dollar- and euro-denominated government debt from emerging markets will drop to US$16 billion in the next two months from US$46 billion in June and July, Bloomberg data showed.