Rally in Emerging Markets Already in Danger of Slowing

(Bloomberg) — Cracks are appearing in Wall Street’s bullish case for emerging markets as hurdles — from Adani Group’s $108 billion rout to the Federal Reserve’s rate-hiking plans — prompt a more selective approach to investment.

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An early 2023 rally in developing-economy assets, fueled by China’s reopening and hopes for looser global financing conditions, is already starting to lose some momentum. Goldman Sachs Asset Management and JPMorgan Chase & Co., among others, are promoting more selective strategies as new risks emerge.

“We aren’t in the environment just yet where can indiscriminately buy,” Angus Bell is a London-based managing director of Goldman Sachs Asset Management. “For countries that faced acute stress last year, it’s not really as though the macro environment has shifted so dramatically that all of the problems that they were facing have now totally evaporated.”

Recent events serve as a reminder to investors of the speed at which moods can change in emerging markets.

MSCI Inc.’s index for developing currencies on Monday headed for its biggest two-day decline since March 2020. The gauge had fallen on Friday after data showing a hot US labor market that bolstered the Fed’s case to keep raising rates. That prompted TD Securities to close out of its bullish bet on Brazil’s real as the currency slumped.

The South Korean won and the Thai baht were among emerging currencies on the back foot on Monday as they reacted to the dollar’s gains.

A similar developing equity gauge, tumbled the most since October amid a continuing selloff in Gautam Adani’s sprawling Indian conglomerate and an uptick in US-China tension.

This contrasts sharply with the impressive start to 2023 in the asset class. Morgan Stanley Investment Management stated that the decade for emerging markets had already begun. Caesar Maasry is the head of emerging cross-asset research at Goldman Sachs and is also the managing director. He still anticipates almost another 10% in gains in developing stocks.

“I don’t think there’s froth,” Maasry spoke in a telephone interview. “There’s more upside in the EM rally.”

Global Chartbook: Fissures in Emerging-Markets Story

Nevertheless, certain assets are beginning to appear more expensive.

“The main short-term reasons arguing against chasing the rally right now are its speed and magnitude,” Jonny Goulden and other analysts at JPMorgan stated this in a Jan. 26 Note. Based on the firm’s analysis of risk appetite for emerging currencies, “some near-term caution is warranted.”

Guido Chamorro of Pictet Asset Management in London was also co-head of emerging currency hard currency debt. He also warned about the dangers associated with market technicals for global bonds. According to him, investors have jumped on new debt to make heavier, overweight positions this year than they did last.

“If there are no bumps in the road ahead, this is not a problem,” He stated. “However, if we do see bumps in the road ahead, then we could see a bit of a shakeout.”

JPMorgan data shows that investment flows into hard currency bond funds are beginning to ease, while local-currency funds have experienced an outflow.

According to Carlos de Sousa (an investor at Vontobel Asset Management, Zurich), debt from Angola has become very expensive. While he sees more broad bond gains ahead, there’s risk inherent in Bolivia’s gloomy political and economic outlook if the global tides turn, he said.

Polina Kurdyavko, head of emerging markets at Bluebay Asset Management, said she prefers debt from companies with stable profit margins and consistent cash flows — such as hydro utilities in Latin America and certain quasi-sovereign credits with state support.

A more nuanced investment strategy is one that many on Wall Street are adopting amid signs that the year’s early momentum in emerging markets may be less linear ahead.

“You get the sense that a good chunk of the returns for the year may have been front loaded,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management, who remains bullish on the promise of China’s reopening. “But in terms of the trajectory, it is looking like it has a lot of runway to it.”

What to Watch

• Investors are anxiously awaiting readings of the inflation data from Brazil and Thailand.

• Before a meeting of the central bank, Mexico’s inflation will be closely monitored.

• China will release CPI data February 9, providing insight as it emerges from its Covid Zero Policy

• The Reserve Bank of India will likely raise rates for the final time in this cycle. Bloomberg Economics reports that the recovery is slowing but the main focus will be on cooling inflation, which remains high, despite slowing growth.

–With the assistance of Farah Elbahrawy, Karl Lester M. Yap.

(Updates on Monday’s decline in Asian currencies in the 6th paragraph.

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