Valuation Caution Returns as Emerging Markets Face 2021 Reality

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Rarely, if ever, can a year have started with price levels in emerging markets looking so divorced from the fundamental backdrop.

Rising Covid-19 case numbers and uneven rates of recovery in the biggest of the developing economies underscore a nagging concern that this will be about as good as it gets for stocks, bonds and currencies. The relative strength index on MSCI Inc’s emerging-market equities gauge is above 70, suggesting the market is in overbought territory. The average yield on local-currency debt is less than 20 basis points above the all-time low of 3.46% reached in May.

The fact remains though that with central-bank stimulus efforts and vaccine roll-outs providing comfort, most investors are confident the rally has further to run. Emerging-market economies will post an average fourth-quarter growth rate of 2.2%, according to a Bloomberg survey, though many see the efficacy of inoculation programs as a key driver for sentiment. The World Bank’s Global Economic Prospects report on Tuesday is set to provide further clues on the pace of recovery.

“Markets are naturally forward-looking, so we have seen a strong rally despite the dark winter with restrictions still in place in many countries,” said Trieu Pham, a strategist at ING Groep NV in London. “We remain constructive going in early 2021, with hopes that we turn a page on the Covid-19 issue and with major central banks remaining dovish.”

Developing-nation stocks ended 2020 at the highest level in 13 years while currencies edged closer to their 2018 record. Local-currency bonds had their best quarter in more than a decade, with investors staring down more than $17 trillion of negative-yielding debt worldwide.

That’s not to say there aren’t enough events to keep traders on their toes this week. Markets could face headwinds after the New York Stock Exchange said it will delist China’s three biggest telecom companies to comply with a U.S. executive order. Chinese oil majors, including CNOOC Ltd., may be next in line for delisting in the U.S., according to Bloomberg Intelligence.

The Georgia Senate runoffs on Tuesday may also affect sentiment toward risk assets, with the outcome set to decide control of the U.S. Senate and influence the ability of President-elect Joe Biden to advance his legislative agenda. Elsewhere, the Gulf Cooperation Council summit on the same day is seen as a possible step in resolving a crisis that erupted mid-2017 when Saudi Arabia, the United Arab Emirates, Bahrain and Egypt severed trade, travel and diplomatic ties with Qatar.

Among a slew of economic data due this week, Turkey’s year-end inflation rate will be in focus as investors seek clues on whether the new central bank chief return to monetary orthodoxy is here to stay.

Inflation Data

  • Turkey’s expected inflation rate leaves Governor Naci Agbal with little choice but to keep access to credit tight well into 2021
    • Consumer prices probably rose an annual 14.2% in December, higher than the central bank’s raised October forecast of 12.1%, and nearly triple the target of 5%
    • The lira was the biggest gainer in emerging markets after the Chilean peso in December, trimming last year’s loss against the dollar to 19%
    • Governor Agbal delivered another meaty interest-rate hike late last month, bolstering credibility with investors after he pledged to tighten policy when needed to keep prices in check
    • The nation’s central bank is analyzing the impact of potential interest-rate cuts that could take place in the first quarter of 2021, Governor Adam Glapinski said
    • While the nation’s peso slipped in 2020, it was still the second-best performer among six Latin American currencies tracked by Bloomberg
    • Indonesia’s CPI is predicted to stay below the central bank’s 2%-to-6% target range for a seventh month
    • Thailand is expected to report a 10th month of deflation on Tuesday
    • Taiwan’s CPI should hold around 0.1% in year-over-year terms in numbers due on Thursday
    • Read more: This Is the Start of a Rally That May Last in 2021: SEAsia Rates

    PMI Releases

    • China’s Caixin services PMI is predicted to show a slight increase when it is published on Wednesday
      • The yuan was the strongest currency in Asia after South Korea’s won in the second half of the year. Although the currency’s rally has stalled at around 6.50 per dollar in the past two months, January may see it resume gains
      • The rupee was one of the worst-performing regional currencies in the second half, though it still gained about 3%
      • While there should be more room for rupee appreciation in 2021, Brad Setser — who will probably be responsible for the U.S. Treasury report on currencies in the new U.S. Administration — advocates a more forgiving attitude to countries that normally run a current-account deficit
      • Many of the gauges may halt the recent streak of gains with sources of potential disappointment including unusually cold weather and power outages in China, and an increase in lockdown measures in South Korea
      • China’s Caixin survey of manufacturing — also due on Monday — is forecast to edge lower, according to a Bloomberg survey of economists
      • Poland and Czech Republic’s PMI are set to show an improvement as well

      Other Data

      • Several Asian countries will release foreign-reserves data for December this week
        • Intervention probably continued during the month in much of the region, although at a slower pace than in November
        • South Korea’s data are due on Wednesday. Exchange-rate valuation effects alone should increase reserves to about $440 billion. The won has stuttered a bit in recent weeks as Covid cases have spiked, but the currency still appreciated almost 11% in the second half of 2020
        • Taiwan’s reserves are also due Wednesday. Valuation effects alone would lead to an increase to about $518 billion. The Taiwan dollar continues its pattern of making intraday gains and erasing them into the close. The very high volumes suggest it may only be a matter of time before the authorities yield ground
        • Thailand publishes reserves and forwards data to Jan. 1 on Friday. The baht is hovering around the key 30 per dollar level as the central bank debates further measures to arrest currency strength

        Chile’s November economic activity on Monday is expected offer its first positive year-over-year reading since before the coronavirus was declared a pandemic, according to seven economists surveyed by Bloomberg

        • Investors will also watch for a potential pickup in December inflation figures later in the week. The peso was the lone Latin American currency to gain in 2020, according to a Bloomberg tracker

        On Thursday, Mexican policy makers will release the minutes of their most recent meeting, when the central bank left its key rate unchanged

        • On the same day, a reading of December inflation will probably flag a pickup from a month earlier

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