EM investors too wary of trade and local risks to buy the dip

Investors aren’t rushing to buy the dip as US-China trade tensions escalate.

The results of India’s elections are due this week, South Africa will decide on interest rates and Argentinian investors will be able to react to Cristina Fernandez de Kirchner’s surprise decision to run as a vice-presidential candidate, potentially adding volatility to an asset class already famed for its erratic behaviour.

“Some interesting opportunities are beginning to present themselves in some spots of the EM universe, but over the coming weeks it feels like caution is warranted,” said Paul Greer, a London-based money manager at Fidelity International, whose emerging-market debt fund has outperformed 98% of peers this year after reducing risk in recent months.

Read: The trade war has sunk emerging markets

Developing-nation currencies relinquished all of their 2019 gains amid growing pessimism over the prospect of a trade deal between the world’s two largest economies, while stocks and local-currency bonds fell to the lowest level since January. Carry-trade returns from eight emerging markets funded by short positions in the dollar slid below its 200-day moving average on Friday, heralding further declines.

“For now, we are being patient, observing the US-China trade negotiations and price action in core rates and equities, and biding our time,” said Greer.

Central Banks on hold

The ANC’s re-election is set to lay the groundwork for another dovish statement from the South African Reserve Bank, according to Bloomberg Economics. While there’s a chance of a few dissenting votes in favour of cutting rates, the central bank will likely remain on hold this year. Policy makers in Nigeria, Egypt and Zambia are also set to maintain their benchmark rates this week, according to Bloomberg Economics. Israel will also hold its main rate Monday, according to analyst forecasts compiled by Bloomberg.

Modi’s fate

The last phase of India’s marathon election ended on Sunday and the nation’s assets rallied Monday after exit polls signalled Prime Minister Narendra Modi’s ruling coalition is poised to retain power. That would give Modi — whom investors view as a relatively pro-business leader — another five years to push forward an agenda that includes a boost in infrastructure spending Votes will be counted on May 23.

“Sentiment toward the INR will likely improve, especially with hopes that portfolio inflows will pick up, but follow through could be limited by USD strength, EMFX weakness and RBI intervention to slow gains,” said Ashish Agrawal, Barclays FX and Rates analyst.

Turkey turmoil

President Recep Tayyip Erdogan ruled out US demands that Turkey delay the purchase of an advanced Russian missile-defense system, and said Moscow may even bring forward the delivery date from July. Pushing ahead with the deal carries a high risk of US sanctions that could plunge Turkey into renewed economic turmoil.

Kirchner’s surprise

Cristina Fernandez de Kirchner will run as a vice-presidential candidate in Argentina’s upcoming elections, stunning many who believed she’d positioned herself to return to the top job. Kirchner will run on the same ticket as Alberto Fernandez, a veteran politician and her late husband’s former cabinet chief, she said in a message broadcast Saturday on her official YouTube channel. The prospect of her return, and potential reversal of President Mauricio Macri’s pro-business stance, put financial markets on edge Argentina will release an activity index on Wednesday that will probably show the economy contracted in March after growing for three months. The numbers could challenge Macri’s election-year push to convince voters that the economy is turning around

Other events and data

Brazil Vice President Hamilton Mourao visits China this week to meet President Xi Jinping and other leading officials, aiming to reestablish a relationship dented by President Jair Bolsonaro’s negative remarks about the Chinese during his campaign last year. Bolsonaro faces an increasingly tough domestic situation amid nationwide protests, political tension and shrinking growth estimates. The real underperformed developing-nation peers last week, falling on Friday to the lowest in eight months.

Zimbabwe will supply the interbank foreign exchange market with $500 million on Monday as its tries to resuscitate a currency trading system implemented in February that’s been plagued by a lack of liquidity. The currency rallied on the black market. Thailand’s newly-elected parliament will convene on Wednesday to begin the process of selecting a prime minister after a disputed election in March. Thailand, Taiwan, Peru and Chile will release GDP figures for the first quarter. Mexico will post final GDP data for the period.