Emerging Markets Seek Next Catalyst as Dust of Midterms Settles - EcoFinBiz Blog

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Emerging Markets Seek Next Catalyst as Dust of Midterms Settles

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(Bloomberg) -- As the results of the U.S. midterm elections became clearer, investors began reassessing opportunities in emerging markets amid a slew of headwinds from President Donald Trump’s trade policies to the end of easy money.

An MSCI index of emerging-market currencies rose as the dollar stayed on the back foot, with a divided Congress emerging as the most likely result after Republicans retained control of the Senate and the Democrats looked poised to wrest control of the House. While investors are likely to welcome the removal of the uncertainty surrounding the vote, focus is now shifting to possible policy gridlock amid an escalation of the U.S.-China trade friction and further removal of stimulus by the Federal Reserve.

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“Investors are going to be relieved to have midterm election news out of the headlines,” said Hannah Anderson, a global market strategist at JPMorgan Asset Management in Hong Kong. Still, with the midterm results, “nothing’s going to change on the trade front. Fears and sentiment about trade are going to continue to be reflected across the EM complex, at least for the next couple of months.”

 Where emerging-market assets stand now
  • MSCI EM stock index little changed
  • The MSCI EM currency measure adds 0.1%
  • Indonesian rupiah, baht lead gains among EM FX 

Below are investor and analyst comments on the impact of the midterm elections:

Nicholas Ferres, chief investment officer at Vantage Point Asset Management in Singapore:

  • “The developments today might take the sting out of the dollar risk for EM”
  • The fund scaled up its wagers on Chinese and other developing-nation equities after the October selloff, before taking some profit as the market bounced this month
  • It maintains a “positive tactical bias” on emerging markets
  • “I am not aggressively bullish EM” amid concerns about the deteriorating growth outlook
  • The fund also added a net long position in 30-year U.S. Treasuries

Saed Abukarsh, the co-founder of Dubai-based hedge fund Ark Capital Management:

  • “We are looking at a consolidation in EM and further gains in the Mexican peso and South African rand”
  • The fund holds “small” wagers that seek to profit from gains in the peso and rand
  • “The House/Senate vote was priced in. The real cat in the hat is the Fed, and the risk is that we could see the back end of the curve dip again”
  • “The risk is that the Fed may begin to rein in their language on potential future hikes in 2019. The risk is that the Fed takes a strong look at the housing numbers and begins to make that a focal point”

Arthur Lau, Hong Kong-based co-head of EM fixed-income at PineBridge Investment:

  • With the Democrats set to reclaim the U.S. House, this is likely to be positive for emerging-market bonds which have suffered since President Trump came into power
  • If the U.S. dollar softens, or it strengthens at a slower pace, this will help local currencies, for example Indonesia’s rupiah, which has rallied
  • Trump’s implementation of tax cuts is likely to be “challenging,” reducing the positive impact on the U.S. economy

Mitul Kotecha, senior emerging-markets strategist in Singapore at TD Securities:

  • A divided Congress is unlikely to change the outlook for emerging markets “significantly” as the Trump administration retains a lot of power over trade policy
  • Should a split Congress result in less dollar bullishness at a time when positioning is heavily long, this could help emerging-market currencies eventually

Shane Oliver, head of investment strategy in Sydney at AMP Capital Investors Ltd.:

  • “It all depends on how Trump reacts, because he might regard the loss of control of the House as a negative, which could mean he becomes even more extremist and dial up the populism even further”
  • “That’s probably the biggest risk, which could possibly mean that he goes in even tougher in terms of dealing with China”

Salman Baig, investment manager in Geneva at Unigestion SA:

  • “Our base case is for the Democrats to take the House of Representatives while Republicans will continue to hold the Senate”
  • “Under our base case, President Trump may come under pressure to seek a de-escalation of the trade war with China in the face of electoral losses, which would be quite supportive for all EM assets, especially Chinese equities”

Hamish Pepper, head of FX and emerging-market macro strategy research for Asia at Barclays Plc in Singapore:

  • The dollar is expected to continue to strengthen against emerging-market currencies while remaining range-bound against its Group-of-10 peers
  • Additional fiscal stimulus is unlikely to come under a divided Congress, with Barclays assigning a small probability to bipartisan support for a modest infrastructure plan
  • But the U.S. economy should continue to outperform the rest of the world as the boost from the current fiscal expansion remains

Tsutomu Soma, general manager of investment trust and fixed-income department at SBI Securities Co. in Tokyo:

  • The U.S. midterm elections look to be ending with no surprises, so the direct impact on emerging markets won’t be that significant after all, while the focus will now shift to the FOMC
  • Regardless of the midterm outcome, the Fed will continue to shrink its balance sheet as it hikes rates, so it’s inevitable that demand for the dollar will continue to be strong; that in turn will be a headwind for EM

--With assistance from Tomoko Yamazaki, Ruth Carson, Andrew Janes, Masaki Kondo and Denise Wee.

To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net;Netty Ismail in Dubai at nismail3@bloomberg.net

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, ;Justin Carrigan at jcarrigan@bloomberg.net, Jenny Paris

©2018 Bloomberg L.P.

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