Gains in emerging markets since the start of the year failed to make UBS Group and Citigroup any less bearish as they saw new risks arising and weakening the chance of 2016- or 2009-style rebound.
The MSCI Emerging Markets Index, the equity benchmark, fell Tuesday after posting the biggest two-day gain in two months. The currencies gauge retreated from the highest level since July. A measure of dollar debt rose for a seventh day Monday, and its local-currency counterpart climbed to an eight-month high.
While the rally through yesterday was supported by China’s move to release more cash into the financial system and by speculation that the Federal Reserve may pause interest-rate increases this year, UBS said the key risks for emerging economies lay elsewhere. Potential declines in trade as well as economic growth could outweigh Fed and dollar moves, it said.
UBS was not alone. Commerzbank said signs of stress were rising in the usually more resilient emerging markets: for instance, Poland was seeing greater uncertainty over the future of Central Bank Governor Adam Glapinski. Nedbank analysts said volatility in the South Africa’s rand will intensify in 2019 due to slowdown in global growth.
Emerging markets have made a strong start in 2019
“Leading indicators point unanimously to a coming contraction in global trade, one that may possibly begin in Q1 2019,” UBS strategists including Bhanu Baweja wrote in an emailed note Monday. “If global trade goes into recession, as we expect, emerging-market currencies will see another round of depreciation.”
Citigroup strategists are “now bearish” on emerging-market sovereign credit “as a whole” because of debt-service pressure. New sovereign issuances may strain the bond markets that are already under pressure from volatility in US and global stock markets, they said.
“One of the monthly peaks in debt-service payments happens in March, with $10.9 billion in the sovereign space and $7.7 billion on the corporate-credit front,” strategists including Luis Costa wrote in their note. “That may be particularly troublesome in January, given the expected pipeline of new issuances on the sovereign front.”
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