Risk signals increase in emerging markets starved of growth

Bloomberg
Putting aside the selloff in stocks, emerging markets didn’t come out of last week too badly, with currencies and bonds carving out gains.

But investors have every reason to be wary.

 

For one thing, the jury’s still out over whether the technology-led equity declines — which saw the main emerging-market index register its worst week since April — were just a correction or the start of something more sustained. Then there’s the myriad of risks that have stalked markets for much of this year, from US-China tensions and America’s looming presidential election to the inexorable spread of Covid-19 and the strain it’s putting on national budgets and growth.

 

Little wonder that beneath the surface there are signs of turbulence ahead. A rally for Brazil’s real and other Latin American currencies may have helped the main emerging-market index post a second successive weekly advance, but a JPMorgan Chase & Co. gauge of expected swings in emerging-market foreign exchange jumped the most in a month. A similar indicator for volatility in stocks climbed the most since June.

 

“It will be hard for emerging markets to sustain the rally if countries can’t deliver growth,” said Claudio Irigoyen, head of Latin American fixed-income and foreign-exchange strategy at Bank of America in New York. “The key for a correction in the coming weeks until we get closer to the US elections will be the dynamics of US real rates and emerging-market activity numbers.”

 

Which is why investors are increasingly concerned that, with central banks running out of ammunition — Malaysia and Peru will likely keep interest rates unchanged this week — and governments poised to pare back stimulus measures, signs of a recovery across the world’s developing economies remain patchy.

 

South Africa, whose rand is among the worst major currency performers versus the dollar this year, will this week probably report an unprecedented economic contraction in the second quarter. By contrast, data from China may say its economy is making more headway. The yuan is one of the biggest gainers of 2020.

 

“Fiscal deterioration as well as subdued potential growth and productivity in emerging markets remain key longer-term concerns of ours,” said Paul Greer, a money manager in London at Fidelity International, which oversees about $566 billion. “We are now anticipating a period of pre-election de-risking and hedging as we head into a highly uncertain US vote on November 3rd.”