EMS to enjoy fresh tailwind of positive sentiment

BENGALURU: Emerging markets (EM) are poised to enjoy a fresh tailwind at an auspicious moment.

President Donald Trump’s weekend approval of Oracle Corp’s bid for the American operations of Tiktok – a move that may take some of the heat out of Washington’s standoff with Beijing – looked poised to give markets a lift as the new week got under way, extending last week’s gains in developing-nation assets.

The Taiwanese dollar and rupiah led an MSCI Inc index of emerging-market currencies to its eighth gain in nine days yesterday as the dollar remained on the back foot. The stocks gauge slipped 0.2%.

Record low interest rates, rising commodity prices and improved mobility data are buoying expectations of a recovery in the world’s developing economies even as investors cast a wary eye toward the US presidential election in November. Yet for all those plus points – and any small boost provided by a gentler geopolitical backdrop – it’s rate differentials that are sustaining much of the investor demand. Bond funds extended their longest streak of inflows since a 12-week run in the fourth quarter of 2017, according to EPFR Global, with China bond funds attracting “above-average” interest.

“Even though policy rates in emerging markets have come down a lot, many of them show meaningful relative interest-rate advantages versus the dollar now, despite benign inflation,” said Morgan Harting, a New Yorkbased money manager at Alliancebernstein who oversees about Us$2.8bil. “This could support ongoing capital flows to emerging markets, which would generally be good for stocks and bonds.”

The MSCI currency index climbed for a fourth week in the five days through Friday, the best run since January. Domestic bonds clocked up their biggest gains since June, while a gauge of stocks rose the most since early June relative to the S&P 500 Index, untroubled by a retreat in US technology shares.

For all the optimism, the evidence of recovery has been uneven, suggesting a protracted return to levels of economic activity recorded before the Covid-19 pandemic and the resulting lockdowns. While China has rebounded, other nations such as South Africa, India and Turkey have lagged behind.

“The area where the pace of recovery has remained weak is the emerging economies outside China, which account for roughly 25% of global nominal dollar GDP,” Chetan Ahya, chief economist at Morgan Stanley in New York, wrote in a report Sunday. “While the emerging markets ex-china recovery has been relatively weak and some of these economies also face structural challenges, we think that the cyclical outlook for the group will improve from the first half of 2021.”

The slowing of the rate-cutting trend among developing-market central banks looks set to continue in the coming week, following the hold decisions from Brazil, South Africa, Russia, Taiwan and Indonesia last week. Policy makers in China, Hungary, Thailand, Egypt, Colombia, Nigeria, Turkey and the Czech Republic are among those due to meet over the next five days.

Of these, Turkey’s decision may be the closest watched as the central bank struggles to shore up the lira while avoiding an outright rate increase that would defy President Recep Tayyip Erdogan’s calls to cut borrowing costs.

Mexican policy makers are expected to lower interest rates by 25 basis points to 4.25% on Thursday, breaking from the pattern of half-point cuts in previous meetings, according to economists surveyed by Bloomberg.