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

The Economic Times - - Money -

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.

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