Emerging Markets Defy Risks With Turkey Taking Center Stage

Nov 20, 2020 | Insights

Even with the U.S. election out of the way, investors could be forgiven for taking a cautious view of emerging markets, given the wall of risks ahead for the world’s developing economies.

Yet the spread of the coronavirus, debt troubles at Chinese state-owned firms and rumbling political tension from Thailand and Turkey to Brazil and Peru are doing little to dissuade the bulls. Underscoring the market calm, measures of implied volatility for currencies and stocks declined for a second week in the five days through Friday.

Quickening growth in developing nations, progress toward the development of a vaccine and unprecedented stimulus are underpinning investor optimism, driving currencies and stocks toward two-year highs. Emerging-market exchange-traded funds attracted fresh resources last week, pushing the two-week inflow to the largest since January.

Bank of America Corp. says the recovery’s just getting started, while Morgan Stanley predicts a “sharp rebound” predicated on a widening U.S. current-account deficit, low real rates in the U.S., a weaker dollar, China’s reflationary impulse and accommodative macro policies. Goldman Sachs Group Inc. cites easing trade tensions as a major tailwind.

“The combination of easy money and vaccine is too powerful and markets have a longer-term horizon than a few months,” said Kit Juckes, London-based chief currency strategist at Societe Generale SA. “The central-bank message is that monetary policy will remain as accommodative as possible and we should expect further easing over the winter. At some point, that is going to revive risk sentiment.”

Weekend events have added to the favorable backdrop. Asia Pacific nations including China, Japan and South Korea on Sunday signed the world’s largest regional free-trade agreement. Advisers to President-elect Joe Biden said they opposed a nationwide U.S. lockdown despite the pandemic accelerating. President Donald Trump briefly acknowledged for the first time that he lost the election, easing concern he will push ahead with attempts to reverse the result.

Turkey’s central bank meeting Thursday under new Governor Naci Agbal will likely be the most closely watched event in emerging markets this week. With investors bracing for a return to a more orthodox, market-friendly approach, a disappointing outcome could send the lira reeling again.

Turkey Hike Wanted

Those on Hold

  • Bank of Thailand’s first meeting under its new Governor is expected to see rates left unchanged on Wednesday
  • Bank Indonesia is also expected to leave rates unchanged on Thursday by the majority of analysts
    • However, with the rupiah the strongest Asian currency since the U.S. election, a minority — including Bloomberg Economics — expect the central bank to cut
  • The Philippine central bank is expected to stand pat on Thursday, although there is a small chance of a cut after the central bank governor pledged to consider the “disappointing” third-quarter growth data at the policy meeting
    • The Philippine peso was almost unchanged last week as markets were disrupted by a typhoon
  • The South African Reserve Bank will probably keep its benchmark interest rate on hold at 3.5%
    • “Renewed lockdowns in advanced economies may dampen the expected improvement in economic activity,” Bloomberg Economics said. “This may justify another cut in interest rates, but we see the risks as already accounted for in the SARB’s aggressive frontloading of rate reductions to date”
    • The rand has been the top gainer in emerging markets in the past month
  • Hungary’s inflation rate fell for a second month in October, easing pressure on the central bank to raise rates on Tuesday
  • Zambia’s central bank will announce on Wednesday its first rate decision with a new governor in place after the nation became the first in Africa to default on its foreign debt since the pandemic struck. Officials may keep policy unchanged as they seek to shore up Africa’s worst-performing currency this year

Data and Events

  • China’s October activity data continued its rebound on Monday
    • Industrial production and fixed asset investment beat consensus, while retail sales missed estimates
    • The yuan was among the worst-performing currencies in emerging Asia last week, underscoring concern about parting shots from the Trump administration. These concerns were further exacerbated by an Axios report that suggested measures would be such that it will be “politically untenable for the Biden administration to change course”
  • Thailand reported better-than-expected third quarter GDP after the government eased restrictions on movement and implemented a series of stimulus measures while getting the country’s Covid-19 outbreak largely under control
  • Indonesia announced an increased trade surplus for October on Monday as imports continued to contract
    • Current-account numbers for the third quarter will be released on Friday, and are expected to show the first quarterly surplus since 2011
  • Philippine remittances rose 9.3% in September from a year earlier, surpassing analysts’ forecast for a contraction of around 4%
  • Taiwan’s October export orders are forecast to show further growth on Friday
    • The U.S. Economic Prosperity Partnership Dialogue with Taiwan will take place in Washington on Friday. Taiwanese officials have expressed optimism that a memorandum of understanding on trade relations can be issued
    • Late losses continue to erase intraday Taiwan dollar gains
  • Investors are watching Peru’s currency, which fell to an all-time low as unprecedented political gridlock left the nation without a president, interim leader or head of congress
    • A reading of third-quarter GDP on Friday is expected to show signs of a recovery after a contraction in the second quarter, according to Bloomberg Economics
  • Chile will probably signal further economic recovery when it releases third-quarter GDP results on Wednesday, though output remains far below pre-pandemic levels, according to economists surveyed by Bloomberg
    • Traders are also watching the advance of a bill through the Chilean Senate that would allow a second early withdrawal of pension savings
  • In Brazil, money managers will want updates on the economic reform agenda now municipal elections have passed. Note that candidates backed by President Jair Bolsonaro registered poor showings, underscoring limits to the political influence of the Brazilian leader
    • The nation is scheduled to release its October tax-collection data this week
  • Colombia’s GDP probably fell less in the third quarter than it did in the second, data on Tuesday is expected to show
    • A reading of September economic activity on the same day will probably flag another contraction from a year earlier, according to Bloomberg Economics
  • South Africa’s sovereign rating will be reviewed by both Moody’s and S&P this week. Citibank expects no ratings action. However, analysts led by Gina Schoeman in Johannesburg say there’s a risk S&P may move to a negative outlook. Less likely, but still possible is that Moody’s issue a further downgrade

— With assistance by Tomoko Yamazaki, and Philip Sanders



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