Emerging markets look to 2021 as Goldman adds to bullish calls

Developing-nation stocks, currencies and bonds rose for a third week in the five days through Friday, and maintained their resilience on Monday, as the prospect of a coronavirus vaccine roll-out in the months ahead outweighed concern that rising infections would lead to tougher curbs in the nearer term. Underscoring investor optimism, a measure of implied volatility for currencies is near the lowest in almost four months.

AstraZeneca Plc became the latest company to report a vaccine that protects the majority of people from coronavirus, following trial successes from Pfizer Inc. and Moderna Inc. The stakes for lower- and middle-income nations are immense as the Astra vaccine costs a fraction of the price set by Pfizer and will be manufactured in multiple countries, from India to Brazil.

Emerging markets are set to outperform the rest of the world as a global economic rebound takes hold starting in the second quarter, according to Goldman Sachs Group Inc. With reduced political uncertainty following the U.S. election and the potential for more positive vaccine updates, analysts and investors from BlackRock Inc. to JPMorgan Chase & Co. and Morgan Stanley have been flagging opportunities in risky assets that have trailed peers.

Investors should “move into pro-cyclical positions heading into year-end instead of waiting for economic data to turn more meaningfully," Goldman analysts, including Andrew Tilton and Kamakshya Trivedi, wrote in a report. The market is likely to “defer difficult questions around vaccine production and distribution for later."

Staring down more than $17 trillion of negative-yielding debt worldwide, investors will continue to be drawn to the higher returns offered by emerging-market assets as global central banks show little willingness to scale back their unprecedented economic-support policies. Minutes of the Federal Reserve’s Nov. 4-5 meeting will show how policy makers view adding to stimulus.

Still, the prospect of an economic recovery in the developing world may have been factored into prices, and investors are concerned about the sharp increase in average fiscal balances and debt burdens this year, said Paul Greer, a money manager in London at Fidelity International. South Africa fell deeper into junk territory after Moody’s Investors Service and Fitch Ratings lowered the country’s credit ratings on Friday as the pandemic pummeled the government’s finances and pushed the economy into its longest recession in almost three decades.

“EM debt still offers attractive risk premium for bond investors that cannot be ignored in an increasingly income-hungry, low inflation and low interest-rate world," Greer said. “The story into 2021, however, remains clouded and much will depend on the evolution of the virus-versus-vaccine trajectory."

With the data calendar light this week, central bank decisions in South Korea, Nigeria and Colombia will be in focus, after Indonesia and the Philippines surprised by cutting benchmark rates last week. Inflation data from South Africa, Brazil and Mexico will be also closely watched.

South Korea Decides

• The Bank of Korea is likely to keep its key rate unchanged on Thursday at a record low of 0.5% during its last policy-setting meeting of 2020, a Bloomberg survey of economists shows
• The central bank will also issue an update to its economic outlook
• They may add their voice to that of the Ministry of Finance in warning of the negative impact of a strong Korean won -- the best performing currency in emerging Asia in the second half of 2020. That said, intervention has not proved successful -- beyond the very short-run -- in preventing past appreciation, if history is any guide
• A bill in parliament proposing the expansion of the Bank of Korea’s mandate to cover maximum employment is also worth keeping a watch for. This faces a number of practical hurdles -- most particularly the nation’s relative labor market inflexibility makes employment less responsive to monetary policy compared with the U.S.

Others on Hold

• Ghana’s central bank on Monday kept its key interest rate at an eight-year low for a fourth straight meeting as inflation edged closer to target and the economy is rebounding faster than expected
• Nigeria may hold borrowing costs on Tuesday after a surprise 100-basis-point cut in September, with the naira remaining under pressure and inflation quickening
• In Kenya, the central bank will probably stay put Thursday after 150 basis points of cuts this year; Angola is likely to be on hold too Friday
• Colombia’s central bank will likely maintain its current monetary policy rate at 1.75% for a second consecutive meeting, signaling an end to the easing cycle, according to Bloomberg Economics
• The Colombian peso has been one of the top gainers in emerging markets this month

Data and Events

• China’s Premier Li Keqiang holds a press conference on Tuesday after a roundtable with heads of the IMF, World Bank, WTO, OECD and others. Hong Kong’s leader Carrie Lam gives a policy address on Wednesday
• China’s October industrial profits will be released on Friday and are expected to show continued strong growth
• The yuan enjoyed a fourth consecutive week of appreciation as strong growth performance and high yields attracted investors
• Local 10-year bond yields climbed about five basis points last week
• Reuters reported that the U.S. administration is close to making public that 89 Chinese aerospace and other companies have military ties, such a declaration would restrict these companies from buying U.S. goods and technology
• Thai October trade numbers released on Monday revealed the country’s ninth consecutive surplus, as imports remained weak
• Weekly FX reserves data on Friday might be more closely watched than usual given how much concern the Bank of Thailand have recently evinced about the baht
• Taiwan October industrial production is likely to continue its solid march on Monday
• Gross domestic product report for the third quarter will be announced on Friday and economists forecast a 3.3% year-over-year expansion
• Taiwan dollar’s pattern of late afternoon depreciation remains unchanged
• The central bank’s efforts to prevent appreciation may come under greater scrutiny under a Biden administration if Brad Setser is retained beyond the transition. Setser has been very focused on currency manipulation in general, and on Taiwan’s case specifically
• South Korean 20-day export numbers for November saw average daily shipments increase 7.6% year-over-year, improving from 5.9% in October
• The country releases consumer confidence figures for November on Tuesday, while December manufacturing business survey will be issued on Wednesday
• The Kospi index closed at record high on the improving trade data and as markets reflected on hopes for vaccine news
• Malaysian October inflation data are due on Wednesday. Consensus expects an unchanged decline of 1.4% in year-over-year terms
• The ringgit was emerging Asia’s best-performing currency last week as intervention slowed gains elsewhere, and as oil prices rose
• India’s third-quarter GDP will be released on Friday and will likely show a further year-over-year decline
• India’s bonds continued to underperform Indonesia’s as yield parity between the two countries looms into view
• South Africa’s inflation probably remained at 3% in October
• The rand strengthened for a third week in the five days through Friday as the central bank held its benchmark interest rate for a second straight meeting and signaled increases next year
• Investors will be watching to see if Brazilian legislators renew debate on fiscal spending reforms and the 2021 budget after agreeing to a tentative voting agenda for the next two weeks
• A mid-November reading of inflation on Tuesday is expected to show a slowdown in price-growth, according to economists surveyed by Bloomberg
• Street protests swept across Brazil and shops were looted after a video went viral showing grocery store security guards beating a Black man to death. Two Carrefour outsourced employees were filmed killing the 40-year-old man in the southern Brazilian city of Porto Alegre on Thursday
• Mexico will also report inflation numbers, along with other economic data including retails sales and third-quarter GDP
• Annual inflation probably slowed in the first half of November, according to analysts
• September retail sales and monthly economic activity are expected to show output remains well below its level prior to the pandemic, according to Bloomberg Economics
• The Mexican peso was the best performer in emerging markets last week after the Russian ruble
• Argentina will release September economic activity data on Tuesday, giving further insight into third-quarter GDP
• Bloomberg Economics expects a recovery in some services to offset a decline in construction and industrial activity, leading to a limited expansion in activity from the month before