Goldman, Morgan Stanley, Citigroup see EM buoyancy

By BLOOMBERG

SINGAPORE • This year won’t see a re-run of nightmare on emerging-market (EM) street, in the view of a trio of top American banks. Goldman Sachs Group Inc said fundamentals in developing markets are mostly intact in wake of the recent stress test from higher US interest rates, a rally in the dollar and jump in oil prices.

Morgan Stanley concurs, highlighting that real interest rates are higher, inflation is lower and current-account balances better in most major EMs than 2013, though Turkey and Argentina are among the exceptions.

Citigroup Inc also sees them being better equipped to ride through bouts of volatility. “We don’t have the significant external imbalance in EM that we used to,” Johanna Chua, Hong Kong-based chief economist for Asia Pacific at Citigroup, told Bloomberg Television’s Yvonne Man and Ramy Inocencio. “The shocks have not really been as bad as they were, for example, during the taper tantrum. Markets have been differentiating across asset classes.”

What all three financial firms do agree on is that investors are going to become increasingly selective. Just a week ago, there were jitters from Italy’s political crisis, adding to concerns over a resurgent dollar, rising US yields and oil prices, in addition to the ongoing trade disputes. The MSCI Emerging Markets Index of equities completed its fourth monthly decline in May, the longest stretch since February 2016, while a gauge that tracks currencies suffered its biggest back-to-back monthly slump since 2016.

Unlike the time of the taper tantrum in 2013, a majority of the central banks in emerging economies will probably have no need to lift rates in an aggressive and pro-cyclical manner, Morgan Stanley economists including Chetan Ahya wrote in a note dated on June 4.

Some, of course, have been forced to act. Indonesia increased its policy rate for the second time in two weeks last Wednesday to defend its currency.

Turkey raised interest rates by 300 basis points at an emergency meeting last month. Argentina hiked its benchmark rate to 40% earlier in May and sought help from the International Monetary Fund.

Despite the noise, Goldman Sachs said it’s “still focusing on relative value in EM, with a positive tilt”.

“Some stability in global rates/risk appetite is likely to be required for differentiation to return,” Goldman Sachs analysts Andrew Tilton and Kamakshya Trivedi wrote in a June 5 report. “We think India bonds are oversold, and continue to see the South African rand as one of the clearest idiosyncratic opportunities.”