End of easing cycle makes for a picky time in emerging markets
JOHANNESBURG - September is shaping up to be the month when the dial on the interest-rate compass no longer pointed so markedly south for the world’s developing economies.
Of the six major emerging-market central banks due to decide policy in the coming week, only one -- South Africa’s -- is forecast to lower borrowing costs, extending a pattern that saw Malaysia, Peru, Ukraine and Chile keep rates unchanged this month.
The diminishing willingness of policy makers to reduce interest rates -- not to mention their scope to do so -- underscores the growing recognition across the developing world that after the wave of stimulus thrown at these economies amid the Covid-19 pandemic, inflation is edging up again. It’s a realization illustrated by the surge in demand for emerging-market inflation-linked bonds, which has pushed down yields on some of the securities to record lows.
Emerging-market “scope for further policy accommodation may be dwindling. Unlike in previous decades, EM now sorely lacks a compelling impetus for investment, with growth drivers weak and yield compensation low,” Societe Generale SA strategists led by Singapore-based Jason Daw wrote in a report. “Increasingly, EM appears to be running on fumes, presenting asymmetric downside risks against limited upside potential.”
For BNP Paribas SA, the absence of a strong carry story as the policy-easing cycle comes to an end means the focus must be on finding value. The bank is cutting its exposure to Brazilian rates and credit, while reducing its allocation in developing-nation sovereign credit to almost zero in its recommended model.
“Despite supportive financial conditions and ample dollar liquidity, the risk-reward of maintaining a substantial long allocation in emerging-market risk assets is no longer attractive,” Gabriel Gersztein, Sao Paulo-based head of global emerging-markets strategy at BNP Paribas, wrote in a report. “We have now switched to a more selective approach, in which idiosyncratic factors and political events play an increasingly important role in our trading choices.”
There are plenty of country-specific risks to consider. Moody’s Investors Service on Friday cut Turkey’s debt to the lowest grade it’s ever given the country, warning of a possible balance-of-payments crisis. In Peru, President Martin Vizcarra is pushing back on an impeachment attempt that made the sol last week’s biggest decliner in emerging markets. Russian President Vladimir Putin, grappling with the fallout from the alleged poisoning of opposition leader Alexey Navalny, is tightening his embrace of Belarus President Alexander Lukashenko as the dictator intensifies a crackdown on protests.
Emerging-market stocks ended a bad week on a improved note Friday even as U.S. tech stocks declined. Indexes of currencies and bonds were little changed as some investors geared up for the Federal Reserve’s two-day policy meeting starting Tuesday.