Currencies in emerging markets considered pricey

EMERGING-MARKET currencies will see little reprieve over time even as the reopening global economy eases investor fears and the dollar weakens, according to strategists at Barclays.

Currencies and government bonds issued by emerging-market countries look too expensive given the challenges they face in tackling the virus outbreak, strategists, including Nikolaos Sgouropoulos, wrote in a research note on Sunday.

“The medium-term trajectory for emerging-market foreign exchange is still lower, and their curves are likely to steepen,” the strategists wrote, referring to expectations of wider spreads between short-term and longer-term government bond yields.

“Long-term fiscal sustainability will remain a challenge for some, even under optimistic post-covid-19 assumptions.”

The MSCI Emerging Markets Currency Index recorded its strongest weekly advance since 2016 last week, with improving economic data and government and central bank stimulus measures helping revive investor confidence. The Bloomberg Dollar Spot Index headed for an eighth straight daily decline in early Asia trading yesterday, extending declines in the wake of the strong US jobs report on Friday that further eroded demand for haven assets.

Barclays strategists said the risk rally has left 10-year government bonds in Chile, Korea, India and South Africa all looking “rich” relative to their model estimates.

“Despite still-wide spreads to lower risk-free rates, emerging-market local bonds are not cheap given local and global fundamentals,” the strategists said. “Weakened emerging market balance sheets are set to worsen, with the largest primary deficits in the last 30 years,” the team wrote.

Primary budget shortfalls exclude debt-servicing costs and are a gauge of underlying fiscal trends.