Emerging markets get thumbs up after staring down tough quarter

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As the old American Timex watch advertising slogan went, they took a lickin’ and kept on tickin’.

Emerging-market stocks beat peers from developed nations in the first quarter as investors tangled with an escalation in trade tensions, a jump in bond yields and bank-funding costs, and a sell-off in technology stocks. And investors, strategists and traders remain bullish on emerging assets for the rest of 2018, a Bloomberg survey shows.

Top picks are Asian stocks, followed by Latin American bonds, according to the survey of 15 participants conducted March 22-28. In currencies, Asia came tops again, ahead of Europe, the Middle East and Africa and Latin America.

“Gradual gains in emerging-market asset prices are still expected, given their healthy economic conditions and tame inflation,” said Takeshi Yokouchi, a senior fund manager in Tokyo at Daiwa SB Investments, which oversees the equivalent of $53 billion. That’s after indexes of emerging-market currencies and equities from MSCI capped five quarters of gains in March.

There are headwinds to mind, though. The Mexican peso, Chinese yuan and South Korea's won are seen most vulnerable to trade disruptions stemming from US President Donald Trump’s protectionist moves, the survey shows. Turkey, Brazil and Mexico are seen to be more sensitive to local political developments. See here a list of elections that could pose tests for markets.

For the charts below, respondents were asked which among 11 emerging-market currencies are most likely to be affected by the risks (positive or negative) cited.

The survey was taken before the Trump administration's announcement on detailed plans for tariffs on Chinese imports, which in turn could trigger Chinese retaliation and disrupt international supply chains that involve production in emerging markets.

Asian economies are seen more tied to China, with risks headlined by a high-stakes financial deleveraging campaign that policy makers hope won’t endanger a targeted 6.5 per cent growth rate.

Meantime, there's always the potential for a boost, or a hit, from commodity prices.

A slide in US technology shares that triggered a global sell-off in March showcased the knock-on effects for emerging markets as well.

While the Fed is pressing ahead with policy normalisation, the European Central Bank is still pumping liquidity that's spilling over into global markets, and is set to do so probably through year-end. The Bank of Japan isn't expected to start its exit from mega-stimulus at least until 2019.

Turning to geopolitics, the currencies seen most at risk are tied to countries that have been embroiled in diplomatic disputes — think Russia’s Cold War-style tensions with the US and Europe, and Turkey's spats with the US and Germany.

And finally there are domestic political risks. Looming presidential elections in Brazil and Mexico will be closely watched, with potentially significant impacts on their financial markets depending on who wins.

The survey participants:

  • Amundi Asset Management
  • BNP Paribas Asset Management
  • CIMB Group Holdings Bhd
  • Daiwa SB Investments
  • Deutsche Bank Wealth Management
  • FPG Securities Co
  • Informa Global Markets
  • Kasikornbank Pcl
  • Krung Thai Bank Pcl
  • Mizuho Bank
  • Mizuho Research Institute
  • Old Mutual Global Investors
  • SBI Securities Co
  • State Street Global Advisors
  • UBS Group AG

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