Biden win emboldens bulls as emerging markets scream buy

The emerging-market bargain-buyers are in celebration mode. And the party’s not over yet.

The prospect of a Joe Biden presidency checked by a divided Congress has gotten everyone from Eaton Vance Corp. to Medley Global Advisors predicting a fresh boost for risk assets, just a week after the stocks, currencies and bonds of developing nations hit the buffers as the US election approached. BlackRock Inc. says developing-nation assets, which look more appealing in this low-rate world, could benefit from a more moderate leader in the White House. The Biden administration’s policy approach will probably reduce uncertainty, according to UBS Global Wealth Management.

Gains for emerging markets would support the view that the election result is likely to cap US interest rates for longer and weaken the dollar, boosting the debt and currencies of developing nations as they struggle to finance efforts to contain the worst of the Covid-19 pandemic.

Gauges of developing-nation stocks and currencies are both at the highest levels in more than two years after getting whipsawed last month by uncertainty over the US election outcome. Local bonds had their best weekly performance since April last week. The Mexican peso and offshore yuan surged on the prospect of reduced trade tensions.

“A Biden presidency with a Republican Senate is likely the best possible scenario for emerging-market assets and if this outcome holds it should provide a very strong backdrop for the asset class,” said Eric Stein, chief investment officer of fixed income at Eaton Vance in Boston. “Biden should have a less confrontational approach to China and other countries than Trump.”

Asia’s markets will likely outperform their emerging peers as the region’s control of the coronavirus pandemic helps economies recover faster than in other parts of the world where strict lockdowns are returning. China’s October exports unexpectedly accelerated and inflation and credit reports due this week will likely signal stable underlying demand.

“The flows data over the past few months suggest that investors’ purchases of EM assets have been heavily biased towards a handful of Asian countries,” said Nick Stadtmiller, a strategist at Medley Global Advisors in New York. “Asian economies are expected to grow faster than other emerging-market peers in the coming year, and that growth differential has been supportive of Asian markets.”

Still, there are some fragile spots to be worried about. Turkey remains on top of traders’ watchlist after President Recep Tayyip Erdogan fired the country’s central bank governor as a series of interest rate increases failed to halt the lira’s slide to a record low. Zambia could become Africa’s first sovereign defaulter since the onset of the pandemic if investors reject on Friday a request to defer interest payments on its $3 billion worth of Eurobonds until April.

In Latin America, Mexico and Peru will decide on interest rates, while an International Monetary Fund mission will arrive in Argentina to negotiate with authorities on a new program.

Turkey’s surprise

• The lira, the worst performing emerging-market currency of 2020, will likely remain volatile after Erdogan appointed former Finance Minister Naci Agbal to replace Murat Uysal as central bank governor.
• The move is unlikely to alter the current trends of inflation, reserves and the lira — if they are not followed by significant changes in policy, according to Goldman Sachs Group Inc.
  • “Only future monetary policy actions will show if the new appointment once again implies a change in policy and, if so, in which direction,” economists Murat Unur and Clemens Grafe wrote in a report.
  • This may be evident by the Monetary Policy Committee’s next scheduled meeting on November 19.

Mexico, Peru to decide

• Mexico’s central bank will meet on Thursday and while many expect officials to leave the key rate flat, Bloomberg Economics is bracing for a quarter-point cut to 4%.
  • Inflation figures for October, meantime, probably ticked higher from a month earlier. September industrial production, out on Wednesday, is expected to flag a recovery from earlier this year while remaining below pre-pandemic levels.
  • The peso was among the top performers in developing markets last week.
• In Peru, policy makers are expected to keep interest rates at 0.25% on Thursday and repeat their plans to keep conditions expansionary, according to Bloomberg Economics.
  • Congress will vote on a motion to impeach President Martin Vizcarra on Monday. Most investors expect the motion to fail just like last month’s attempt, but political uncertainty held back the Peruvian sol last week.

Data and events

• China will announce CPI and PPI data on Tuesday. CPI probably slowed to 0.8% in October from 1.7% the previous month, according to a Bloomberg survey. China’s economy has been recovering from the pandemic but household spending may still be relatively weak.
  • China’s local bonds have returned 6.8% this year in dollar terms, according to a Bloomberg Barclays index, while the onshore yuan has gained more than 5%.
  • China may also report on aggregate financing this week, which will reveal how much credit is supporting the economy
• The Philippines will report third-quarter GDP on Tuesday, and Malaysia will announce the same data on Friday.
  • Both nations are expected to say their economic contraction slowed in the period even as virus cases continued to take a toll.
  • The Philippine peso is the third-best performing Asian currency outside China this year, while the Malaysian ringgit has weakened.
• Taiwan will release October trade data on Monday. A recovery in exports and rising demand for technology products has seen the Taiwan dollar gain more than 5% this year.
• India will report CPI figures on Thursday. Accelerating inflation has kept the Reserve Bank of India on hold since it cut interest rates in May. CPI for October is estimated at 7.25%, still above the RBI’s target range of 2% to 6%. India is also scheduled to report trade statistics this week.
  • India’s local bonds are one of the best performers in Asia this year, even as the rupee trails all of its regional peers.
• Myanmar started counting millions of votes cast Sunday in the country’s second election since military rule ended in 2011, with de facto leader Aung San Suu Kyi and her ruling National League for Democracy expected to win another term.
  • The kyat has climbed about 13% against the dollar this year, according to data compiled by Bloomberg.
• In Brazil, retail sales data for September, to be released on Wednesday, will be watched for signs of how lower emergency aid transfers effected consumer habits. A reading of economic activity for the same month will probably show a fifth monthly increase, according to economists surveyed by Bloomberg.
• Investors will watch for signs of more orthodox economic measures from Argentina as it tries to shore up investor confidence and lure capital back into the country after failing to stem a run on its currency with heavy-handed restrictions.
  • An IMF mission will arrive in Buenos Aires on Tuesday.
  • A reading of October inflation will probably show a pickup.
• Colombia will release September retail sales and industrial production data on Wednesday, which may offer clues on the pace of recovery.
  • The nation’s central bank last week improved its 2020 growth forecast saying the recovery in the third quarter was faster than expected.
  • The Colombian peso was one of the best performers in emerging markets last week.