Is it time to get picky in emerging markets? Here’s what money managers say

Emerging-market investors are turning more selective as last year’s everything rally splinters under the weight of higher inflation expectations.

Exposure to U.S. growth and the impact from higher commodity prices are some of the criteria used by money managers from JPMorgan Asset Management to State Street Corp. Mexico, South Africa and Taiwan rank among the top choices as firms pare back their bullish bets for developing-nation assets, according to recent surveys.

“There is still meaningful scope to generate returns within EM as long as investors are able to differentiate,” said Tai Hui, chief Asia market strategist at JPMorgan Asset Management in Hong Kong.

Bloomberg

Investor enthusiasm toward emerging-market assets has waned this year as Covid-19 infections engulf nations from India to Brazil while Treasury yields push higher amid rising price pressures. The MSCI Emerging Markets Index has slid almost 10% since its mid-February high and the Bloomberg Barclays EM Local Currency Government Bond Index is down 1.6% from its January peak.

U.S. Exposure

With a strong recovery in the world’s largest economy set to drive global growth this year, investors are looking for ways to piggy-back on that trend.

That makes Mexican, Taiwanese and South Korean equities attractive given their strong ties to the U.S., said Shaniel Ramjee, a senior investment manager at Pictet Asset Management in London, who helps manage $252 billion.

The Mexican stock benchmark has climbed 12% this year, easily beating the 1% rise in MSCI’s index of developing-nation shares. The South Korean and Taiwanese equivalents are also outperforming, though the latter saw a steep selloff last week amid jitters over a Covid-19 outbreak and pricey tech stocks.

Bloomberg

Commodity Surge

The connection to commodity prices is also boosting the Mexican peso, said Emily Weis, a macro strategist at State Street in Boston. A combination of stimulus measures, vaccine rollouts and supply shortages has pushed everything from copper to lumber and iron ore to multiyear highs or records.

“Improving commodity prices are still a net positive for EM commodities currencies given the sheer percentage of exports,” Weis said.

The Russian ruble and South African rand also stand to benefit from the commodities rebound, according to Pictet’s Ramjee. The rand is the top emerging-market currency year-to-date thanks in part to South Africa’s exports of metals like platinum and iron ore, while the ruble has benefited from Russia’s oil exposure.

Bloomberg

But perhaps nowhere is the power of the commodity boom more on display than Brazil, where exports of soybeans and iron ore have boosted the real.

Other nations haven’t been so lucky. Currencies in Colombia, Argentina, Peru and Turkey — countries with some of the biggest increases in virus infections globally — are among the worst performers in emerging markets this year.


Yield Spike

Some investors say they’re sticking with local currency-denominated bonds that may be more insulated from American monetary policy.

“Local markets are becoming more attractive,” said Shamaila Khan, the head of emerging-market debt at AllianceBernstein in New York, singling out South African, Russian and Mexican local bonds as among the most appealing. “Selectively, we are finding value.”

Rate Calls

The People’s Bank of China on Monday will review its key money-market rate — the one-year medium-term lending facility. The PBOC last cut the gauge in April 2020 to the current 2.95% to support the economy amid the pandemic

• China releases data for April the same day, including industrial production, retail sales and fixed assets
• The PBOC will publish the one-year and five-year loan prime rates on Thursday
• The yuan has gained more than 1% this year
• South Africa will probably keep its interest rate unchanged on Thursday amid an imminent third wave of Covid-19 infections
• Data on Wednesday will probably show the nation’s headline consumer-price index rose 4.3% in April from a year earlier, though that’s still below the 4.5% midpoint of its target range this quarter

Chile Votes

• Investors are keeping a close eye as Chileans elect members of the body that will rewrite the country’s constitution
• Bank of America Securities cautioned last week that treating the elections as a “non-event” may come with negative surprises as polls suggested a high share of undecided voters
• The nation’s first-quarter gross domestic product data on Tuesday will be an indication if economic recovery is on track, with the consensus of economists surveyed by Bloomberg expecting a 0.5% increase from a year earlier

Biden-Moon Meeting

• U.S. President Joe Biden will meet his South Korean counterpart Moon Jae-in on Friday, with North Korea high on the agenda. Moon will be only the second foreign leader since Biden’s inauguration to visit the White House
• South Korea’s won posted the worst decline in Asia this past month

Data and Events

• Thailand will say on Monday that gross domestic product shrank 3.3% in the first quarter from a year earlier, a fifth consecutive quarterly contraction, according to a Bloomberg survey. That would still be an improvement from the 4.2% decline in the previous three months
• Thailand will publish customs trade figures on Friday. The weaker baht may have improved the competitiveness of the country’s exports, which rose 8.5% in March from a year earlier
• The Philippines on Monday will release March data for overseas workers’ remittances, a key source of foreign exchange
• Indonesia will announce April trade figures on Thursday
• Taiwan’s export orders for April are due on Thursday. The Taiwan dollar has outpaced all of its Asian peers this year amid buoyant demand for semiconductors
• Russia’s 1Q GDP reading could beat consensus, with a slowing virus outbreak and rising oil output, according to Bloomberg Economics
• The ruble has topped most peers in the past month
• A reading of Peru’s March economic activity on Monday and first-quarter GDP data Thursday will probably show that the nation is recovering even as the rate lingers below pre-pandemic levels
• In Argentina, Bloomberg Economics expects a Thursday reading of March activity to show a near-recovery of February’s decline following the relaxation of several pandemic-induced restrictions
• The peso is the worst currency in Latin America this year
• Mexico will post its March retail sales on Friday, which traders will monitor for signs of recovering household demand
• Brazil’s Senate is set to continue its probe into the handling of the Covid-19 crisis, which could impact the political and electoral outlook, according to Bloomberg Economics. Any developments on tax reform plans will also be a key driver
• The real, which outperformed all its regional peers over the past month, could see even more support as local investors trim long-standing bets against the currency

–With assistance from Lilian Karunungan, Nicholas Reynolds and Debarati Roy.