Traders Suddenly Dare to Believe in An Emerging-Market Rally
Turkey, South Africa, Indonesia set to hold interest rates; the US dollar has peaked, supporting emerging markets, says Fidelity
New York: It’s a measure of how the climate has changed so quickly for emerging markets that this week’s interest-rate decision in Turkey, an event that would have had traders on tenterhooks six months ago, is being anticipated with a virtual shrug.
Far from encapsulating the vulnerability of the developing economies as it did last year, the lira’s torrid start to 2019 is doing little to take the sheen off the growing sense of recovery seeping through emerging markets.
True, the next development in the trade talks or a flurry of negative economic indicators from China could change everything, as Monday’s declines clearly illustrate. But for now the Federal Reserve’s more dovish tone -- and central bank largess in general -- combined with falling volatility, relatively low valuations and rising commodity prices are keeping most investors positive.
Monday’s price action aside, emergingmarket spreads have been narrowing, while stocks and currencies have been celebrating their biggest weekly rally since early November. And a Bloomberg foreign-exchange index that measures carry-trade returns from eight emerging markets, funded by short positions in the dollar, just climbed for a fourth week, its longest winning streak in almost a year.
“The U.S. dollar has now peaked, Fed policy has turned and China is responding to slower growth momentum with monetary and fiscal stimulus,” said Paul Gre- er, a London-based money manager at Fidelity International, who is overweight developing-nation credit, currencies and local bonds. “All of these factors, coupled with cheap valuations and a recovering oil price, should be supportive for EM risk-asset performance.”
By the way, with Turkey’s economy sliding toward a recession, most economists expect the central bank to keep interest rates on hold Wednesday. The South African Reserve Bank and Bank Indonesia will likely do the same the following day.