The emerging market rally of the year threatens to slow down

(Bloomberg) – Cracks are appearing in Wall Street’s bullish case for emerging markets as roadblocks — from Adani Group’s $108 billion withdrawal to its rate hike plans Federal Reserve — promoting a more selective investment approach.

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The early 2023 recovery in developing-economy assets, fueled by China’s reopening and hopes of looser global financial conditions, has begun to take its toll. take some momentum. As new risks arise, Goldman Sachs Asset Management and JPMorgan Chase & Co. among those offering more selective strategies.

“We are not yet in an environment where we can buy indiscriminately,” said Angus Bell, managing director of Goldman Sachs Asset Management in London. “For the countries that faced extreme stress last year, it is not true that the macro environment has changed so dramatically that all the problems they are facing are now completely gone. “

For investors, recent events are a reminder of how quickly moods can change in emerging markets.

MSCI Inc. Index. On Friday, developing currencies posted their biggest one-day decline, on a closing basis, since early December after data showing a warming US labor market underpinned the outlook. Fed will continue to raise interest rates. That prompted TD Securities to stop betting bullish on the Brazilian real as the currency fell.

Meanwhile, a similarly growing equity gauge just came out of its first weekly loss of the year amid a sell-off in Gautam Adani’s thriving India group and US-China tensions. increase.

All this stands in stark contrast to an stellar start to 2023 for the asset class, when Morgan Stanley Investment Management said the emerging markets decade had begun. Caesar Maasry, head of emerging cross-asset strategy research and chief executive officer at Goldman Sachs, still expects nearly 10 percent more returns from growing stocks.

“I don’t think there is foam,” Maasry said in a phone interview. “There are more upsides to the EM rally.”

Global ledger: A crack appears in the story of emerging markets

However, some properties are starting to look more expensive.

“The main short-term reason against chasing bullish momentum right now is its speed and intensity,” said JPMorgan analysts including Jonny Goulden. Based on the company’s analysis of risk appetite for emerging currencies, “some near-term caution is warranted.”

Guido Chamorro, co-head of emerging markets hard currency debt at Pictet Asset Management in London, also cautioned against the dangers of market techniques for global bonds. Compared with last year, investors have been eager to buy new debt to build heavier overweight positions, he said.

“If there are no bends in the road ahead, this is not a problem,” he said. “However, if we see bumps on the road ahead, then we could see a bit of a shake-up.”

According to JPMorgan data, investment in strong-currency bond funds has eased somewhat, while local currency bond funds have been withdrawn recently.

Carlos de Sousa, an investor at Vontobel Asset Management in Zurich, said debt from Angola and South Africa has become relatively expensive. Although he sees more bond gains ahead, there are risks inherent in Bolivia’s bleak economic and political outlook should the global situation change, he said.

Polina Kurdyavko, head of emerging markets at Bluebay Asset Management, said she prefers debt from companies with stable margins and steady cash flow – such as hydroelectric companies in Latin America and some credits are quasi-sovereign with state support.

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

“You get the feeling that a big chunk of the year’s gains may have gone,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management, who remains upbeat on China’s promise of reopening. preloaded. “But in terms of orbit, it looks like it has a lot of runways.”

What to see

  • Investors are bracing for inflation readings from Brazil, Thailand and the Philippines

  • Inflation in Mexico will be closely watched ahead of central bank meeting

  • China to release CPI data on February 9, providing details as the country exits Covid Zero policy

  • The Reserve Bank of India is set to raise interest rates, possibly for the last time in this cycle. According to Bloomberg Economics, the recovery is slowing, but the focus will be on cooling core inflation, which remains high.

–With support from Farah Elbahrawy.

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