SA and other EM bonds seen as shelter for global investors from US Election twists
In a year of global political surprises, U.S. electoral uncertainty is pushing emerging-market investors to seek refuge in battered assets. With Kamala Harris' policies and the presidential race still unclear, investors are focusing on assets in Brazil, India, and Nigeria, driven by domestic factors rather than global politics. As Joe Biden exits the presidential race, emerging currencies like the Mexican peso and Brazilian real show short-term gains, highlighting the evolving landscape in developing markets.
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By Carolina Wilson, Vinícius Andrade and Ronojoy Mazumdar
In a year marked by electoral surprises from India to South Africa and Mexico, the latest twist — now in US politics — is prompting emerging-market investors to tout some of the most battered assets in the developing world.
The lack of clarity ahead — Kamala Harris' policies and her odds against Donald Trump in the November vote are still unknown — has investors from Van Eck Associates to Robeco bracing for volatility. To shield themselves from swings, they're recommending hard-hit assets, like those in Brazil, or ruled by more domestic drivers than global politics, such as India and some frontier economies like Nigeria.
Joe Biden's withdrawal from the US presidential race led to the unwinding of some early so-called "Trump trades," with Latin American currencies like the Mexican peso rallying on Monday. It was one of the few outliers in what was largely a muted market reaction to Biden's Sunday announcement, which has bond traders weighing the political shakeup.
"We need to be careful in not overtrading the US election as it is still quite early and likely to remain volatile," said Thys Louw, a portfolio manager at Ninety One UK Ltd. "We've tried to keep risk focused on trades we see as having strong enough domestic performance drivers," Louw said, citing frontier currencies and the Turkish lira as examples.
As the US political drama unfolds, emerging-market investors are increasingly focusing on country-specific factors and domestic drivers. That reflects a growing recognition that while global events can trigger short-term volatility, long-term performance in developing assets is often more dependent on local fundamentals and policy decisions.
While lower odds of a Trump victory and a Republican sweep are "on margin" positive for reducing "noise" related to EMs, "lower rates in developed markets, anchored inflation in EMs, and structural improvements on creditworthiness will ultimately be bigger drivers in the long-run," said Janet He, head of EM sovereign research at JPMorgan Asset Management.
'Tactical Bounce'
There's room for a "tactical bounce" in local FX and rates markets in Latin America, according to Gordian Kemen, head of emerging-market sovereign strategy at Standard Chartered Bank.
The Mexican peso, Colombian peso, and Brazilian real emerged as bright spots Monday, leading emerging-market gains. All three were among the laggards the previous week amid growing concerns about government spending and as carry traders dumped positions amid a rally in the Japanese yen.
Those advances were short-lived, though, with the first two falling in Tuesday trading. The real rose 0.1% after opening lower.
Credits that already sold off for unrelated reasons — such as Brazil and Mexico — are now "cheap and attractive," said Eric Fine, head of emerging-markets active debt at Van Eck.
Money managers are also touting Asia as a place to park cash. Nations such as India are emerging as resilient picks, while Indonesia appears to be more vulnerable in an uncertain US political landscape, according to Robeco.
"India is an obvious one to be more resilient, given it's significant domestic orientation and non-aligned foreign policy approach," said Philip McNicholas, Asia sovereign strategist at Robeco in Singapore. "Indonesia appears more vulnerable due to well-known external financing sensitivities."
Looking ahead, investors are continuing to weigh the potential for increased volatility against opportunities in markets with strong fundamentals. Anupam Damani, co-head of emerging-market debt at Goldman Sachs Group Inc.'s asset-management division, is cautious on Asian currencies as most election scenarios point to a rising dollar.
They also continue to point to another key driver for EM assets — the Federal Reserve. While political developments capture headlines, many investors argue that US monetary policy remains the most critical factor for developing assets, with far-reaching implications for capital flows, currency valuations, and overall risk appetite in developing economies.
"In the near term, we believe the potential for Fed rate cuts will dominate markets, potentially weakening the dollar and leading to stronger commodities and EM currencies," said Jennifer Gorgoll at Neuberger Berman.
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