Citigroup joins UBS to predict agony for emerging markets
Gains in emerging markets since the start of the year failed to make UBS Group AG and Citigroup Inc any less bearish as they saw new risks arising and weakening the chance of 2016- or 2009-style rebound.
The MSCI Emerging Markets Index, the equity benchmark, fell on Tuesday after posting the biggest two-day gain in two months. The currencies gauge retreated from the highest level since July. A measure of dollar debt rose for a seventh day Monday, and its localcurrency counterpart climbed to an eight-month high. While the rally was supported by China’s move to release more cash into the financial system and by speculation that the Federal Reserve may pause interest-rate increases this year, UBS said the key risks for emerging economies lay elsewhere. Potential declines in trade as well as economic growth could outweigh Fed and dollar moves, it said.
UBS was not alone. Commerzbank AG said signs of stress were rising in the usually more resilient emerging markets: For instance, Poland was seeing greater uncertainty over the future of Central Bank Governor Adam Glapinski. Nedbank analysts said volatility in the South Africa’s rand will intensify in 2019 due to slowdown in global growth.
Not all banks are bearish on emerging markets. Morgan Stanley turned bullish on emerging-market sovereign debt due to attractive valuations, strategists Simon Waever and Jaiparan S Khurana wrote in note. Recent dips in emergingmarket currencies are an opportunity to add risk, Morgan Stanley strategist Andres Jaime said in a report. “Leading indicators point unanimously to a coming contraction in global trade, one that may possibly begin in Q1 2019,” UBS strategists including Bhanu Baweja wrote in an emailed note last week. “If global trade goes into recession, as we expect, emerging- market currencies will see another round of depreciation.” Citigroup strategists are “now bearish” on emerging-market sovereign credit “as a whole” because of debt-service pressure. New sovereign issuances may strain the bond markets that are already under pressure from volatility in US and global stock markets, they said. “One of the monthly peaks in debtservice payments happens in March, with $10.9bn in the sovereign space and $7.7bn on the corporate-credit front,” strategists including Luis Costa wrote in their note. “That may be particularly troublesome in January, given the expected pipeline of new issuances on the sovereign front.”
A display of a commemorative South African 100 rand banknote in Pretoria (file). Nedbank analysts have said volatility in the rand will intensify in 2019 due to slowdown in global growth.