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Emerging markets seen coming back from dour 2018, led by Brazil

Dec 25 2018 19:08
Bloomberg News

Forget the schnapps this season and grab a caipirinha. The new year will usher a rebound in beaten-up emerging markets, with Brazil leading the charge, a Bloomberg survey shows.

Equities, currencies and bonds of developing economies have found a floor and will likely outperform their developed-nation counterparts in 2019, the survey of 30 investors, traders and strategists by Bloomberg showed. Brazil was the top pick for all three asset classes, with Indonesia another standout. Turkey, with its economy on course for recession, came bottom of the table on two counts.

Key to the anticipated 2019 turnaround is a less aggressive Federal Reserve, which dialled back projections for interest rates and economic growth as it hiked borrowing costs on Wednesday. That offers relief to developing nations that ramped up their dollar borrowing in recent years.

A bottoming out in China’s slowdown and reduced tensions on the trade-war front would also help emerging markets after their worst performance since the 2015 Chinese hard-landing scare.

market investors


"With the Fed moving towards the end of its tightening cycle, funds are likely to return to emerging markets," said Hironori Sannami, an emerging-market currency trader at Mizuho Bank in Tokyo. "But the picture isn’t all that rosy given how the US-China trade friction will remain, keeping investors on their toes. If that trade concern clears up, risk appetite could come back even more."

For now, emerging stocks are poised for a third straight quarter of declines, though currencies and bonds are both enjoying a recovery from mid-year pain.

The MSCI Emerging Markets Index of stocks is down 17% so far this year as of 08:33, while MSCI’s currency measure is 4.2% lower. The Bloomberg Barclays index of EM local bonds is down 1.7% since the year began through Wednesday.

A majority of respondents in the December 5 to December 17 survey expect all three asset classes to rise in 2019, as illustrated in the chart below.

Rebound

And majorities across the board expect developing-nation assets to do better than developed-country ones, as seen below.

Outperforming


And majorities across the board expect developing-nation assets to do better than developed-country ones, as seen below.

"Emerging-market equities look cheap, relative to developed markets and have underperformed significantly in 2018, so due for a rebound," said Daniel Morris, senior investment strategist in London at BNP Paribas Asset Management.

One market that’s less cheap now than it was mid-year is Brazil, where assets have rallied on optimism that the right-wing victor in the country’s presidential election, Jair Bolsonaro, will succeed in pursuing reforms and curbing the debt load of Latin America’s biggest economy.

More recently, Indonesian markets have been on the rebound, after the country was battered by a tumbling exchange rate that prompted growth-damping rate hikes.

A Fed pause, along with a trade deal with the US, leaves Mexican assets looking good in the survey, in turn helping Latin America on the regional-preference breakdown, as seen below.

Regional rankings


As to what will make or break emerging markets in 2019, survey responses appear below.

Biggest drivers

Finally, here are charts illustrating the outlooks for inflation, economy and monetary policy for 11 economies included in the survey.

inflation outlook
economic outlook
Central bank policy

equities  |  emerging markets  |  markets
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