Fed Hopes, Oil Rebound Buoy Emerging Markets
17 January 2019 - 12:29AM
Dow Jones News
By Ira Iosebashvili
A rally in some emerging market assets has picked up steam in
recent weeks, boosted by a surge in oil prices and expectations for
a cautious Federal Reserve.
The MSCI Emerging Market Index, which measures stock
performance, is up more than 4% this year, powered by gains in
Russia, Mexico and other developing countries. A separate MSCI
index that tracks foreign exchange stands near its highest level
since the summer, thanks to rallies in the Brazilian real and other
emerging-market currencies.
Investors often look to emerging markets -- where many hope to
garner bigger gains by assuming comparatively greater risk -- as a
gauge of overall market sentiment. The big drop in U.S. stocks last
year was preceded by steep declines in the assets of countries like
Argentina and Turkey, as worries over Fed tightening and global
growth dried up risk appetite.
Cheap valuations in the wake of last year's selloff have been a
key draw for emerging-market investors in recent weeks. Investors
sank a net $26.6 billion into emerging market equity funds in last
year's fourth quarter, even as they pulled $98.2 billion from funds
focused on developed market stocks, data from fund-tracker EPFR
Global showed. The inflows have continued into 2019, with investors
pouring some $2.1 billion into emerging market stock funds in the
week to January 9.
Those bets are paying off early in 2019. Oil prices have clawed
back some of last year's steep decline this month, buoyed by easing
trade worries and reports that Saudi Arabia would further reduce
its crude-oil exports. That has been a boon for the assets of
countries that export oil, including Russia and Brazil. Other
commodities, like nickel and palladium, have also climbed.
A further boost to emerging market sentiment came earlier this
month, when Federal Reserve Chairman Jerome Powell hinted that the
central bank may not raise rates this year at the same pace it did
in 2019. Mr. Powell's comments mitigated the fears of investors who
had worried that rapidly tightening monetary policy would stifle
growth, while higher yields on U.S. government bonds would dim the
allure of emerging market assets.
Minutes from the Fed's latest monetary-policy meeting, released
last week, showed officials believed they could be close to ending
their recent series of rate increases, bolstering dovish sentiment
further.
"I trust this rally," said Paresh Upadhyaya, a portfolio manager
at Amundi Pioneer Asset Management.
Expectations that the Fed is slowing its pace of rate increases
are making investors more comfortable holding high-yielding
emerging market assets, Mr. Upadhyaya said. He owns the Argentine
peso and the country's local currency bonds, which he believes will
benefit from fiscal improvements Argentina made since signing a
bailout package from the International Monetary Fund last year. He
also owns the Indian rupee, betting that last year's drop in oil
prices will help the economy of India, an importer of crude.
Another important consideration for investors is a U.S. dollar
that many believe is due to weaken after a strong 2018. Valuation
metrics compiled by TD Securities showed the dollar is between 4%
and 19% overvalued against other major currencies. Bets on a
stronger dollar in futures markets stood near their highest level
since 2015 in mid-December, the latest period for which data is
available, suggesting that the dollar is at risk for a sharp
reversal if investor views on the currency turn unfavorable.
A key theme in early 2019 will be investors "dumping the
expensive [dollar] in search for cheap currencies outside the
U.S.," analysts at TD Securities said.
Much can go wrong for emerging markets this year, analysts said.
Unnerved investors can pull back from risky assets and head for
popular havens such as gold or Treasurys if U.S. stocks grow too
volatile. Evidence that global growth is declining more than
anticipated can also sour appetite for emerging markets and push
investors back into U.S. assets, analysts said.
Still, many are betting that emerging markets left the bulk of
their problems behind in 2018. OppenheimerFunds recently raised
their allocation to emerging market equities to "overweight,"
betting that a fresh round of Chinese economic stimulus and signs
of progress in the trade dispute between Washington and Beijing
will stoke investor appetite for the beaten down assets of
developing countries.
"Emerging market asset valuations remain the most attractive
globally, though a catalyst is necessary for current circumstances
to change," the firm said in its 2019 outlook. "A trade agreement
coupled with lowered U.S. growth expectations could be the
catalyst."
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Write to Ira Iosebashvili at ira.iosebashvili@wsj.com
(END) Dow Jones Newswires
January 16, 2019 08:14 ET (13:14 GMT)
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