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Emerging market sell-off is only going to get worse - survey

Jul 13 2018 07:40
Bloomberg

With the Federal Reserve still boosting interest rates and President Donald Trump still raising tariff threats, the bottom for emerging markets remains some way away, market players say.

The selloffs in developing-nation currencies and stocks are likely to continue in the second half of 2018, a survey of 20 investors, traders and strategists by Bloomberg shows.

It’s not all doom and gloom, though – bonds may fare better for their relative safety, and some particular markets might see gains, according to the June 26 to July 4 poll.

The allure of riskier assets is starting to fade amid escalating US-China trade frictions and the Fed’s continuing quantitative tightening. Currencies and equities completed their worst quarter since the worries about a China hard landing back in 2015.

A Bloomberg Barclays index of emerging-market local-currency debt posted its first three-month drop since 2016 as investors became more selective. All three measures have made little headway so far in July.

“Investors aren’t done worrying about the outlook for emerging markets, as we expect the environment for a stronger dollar to continue,” said Hideaki Kuriki, chief fund manager in Tokyo at Sumitomo Mitsui Trust Asset Management, which oversaw the equivalent of $90bn (about R1.2 trn) as of March.

“The US economy is strong on a relative basis and the dollar and yields there are also high – and that’s why emerging markets will continue to struggle.”

Respondents were asked to rank the most important drivers for the developing markets.

In the second half, the Russian ruble, South Korea’s bonds and India’s stocks are most favoured, followed by Poland’s currency, debt and equities.

Argentina, which has had to raise its benchmark central bank rate to 40% this year to defend its currency, came at the bottom of the list for all the asset classes.

Survey respondents were also asked about inflation, general economic and central bank monetary policy outlooks for 11 developing economies. The survey was conducted prior to Turkey’s president removing senior officials respected by investors.

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