Stronger Fundamentals
One reason is that emerging-market countries are on a stronger footing now compared with three years ago during the so-called taper tantrum when then Federal Reserve Chairman Ben Bernanke’s signal to reduce monetary stimulus sent a shock wave through global markets. Developing-nation local-currency bonds lost about 16 percent in less than four months.
Economic growth is picking up this year for the first time since 2010, with Brazil and Russia digging themselves out of recessions, the International Monetary Fund estimates. The average shortfall of current accounts in South Africa, Brazil, Turkey, India and Indonesia, a group branded as the “fragile five” by Morgan Stanley in 2013, has shrunk to 2.4 percent of gross domestic product, from a record 5 percent in 2013, according to data compiled by Bloomberg. Foreign reserves have increased in countries including Indonesia and India, providing them with ammunition to defend their currencies.
“Fundamentals are much stronger than going into the taper tantrum.” said Paul McNamara, a money manager at GAM UK Ltd. The selloff “just strikes me as a little bit extreme,” he said.
Strategists at Morgan Stanley and Citigroup Inc. warn that the rout is likely to deepen. Trump’s protectionist overtures, if acted upon, would slow exports from and reduce investments to developing markets, they say.
In addition, central banks in the U.S., Europe and Japan are either ready to raise borrowing costs or stop easing further, dragging Treasuries yields up and putting pressure on emerging markets, Citigroup’s analyst Dirk Willer wrote in a note Friday. Local debt in Mexico, Poland and Hungary are most vulnerable to rising U.S. yields, he said.
Analysts at Morgan Stanley estimate that investors are overweighting domestic bonds and have hedged between about 10 percent and 30 percent of their currency exposure in Brazil, Indonesia, Russia and South Africa. If the selloff extends, investors may have to cut their holdings and increase their purchases of insurance, exacerbating the decline.
For now, McNamara said he’s willing to give Trump the benefit of the doubt. He’s looking to buy the South African rand once there’s some clarity about the direction of the new U.S. government.
“We just sit tight at the moment,” said McNamara, whose Julius Baer Local Emerging Bond Fund returned 13 percent this year. “All the negative is based on various assumptions. We’ve got very little hard evidence in terms of what the new administration is going to mean for emerging markets.”
This article was provided by Bloomberg News.