June 8, 2020 / 5:47 PM / a month ago

Catching up: How much further can emerging assets run?

LONDON (Reuters) - The global risk rally has lifted some badly bruised emerging assets, but investment managers are split on how much momentum is left to support developing stocks, bonds and currencies amid the challenges of kickstarting coronavirus-hit economies.

FILE PHOTO: An empty airline check-in hall is seen at Guarulhos International Airport amid the outbreak of the coronavirus disease (COVID-19), in Guarulhos, near Sao Paulo, Brazil, May 25, 2020.REUTERS/Amanda Perobelli/File Photo

Investors pulled more than $80 billion from developing stocks and bonds in March as the fallout from the coronavirus pandemic and a oil shock ripped through world markets.

Since then, some of that money has returned, especially to Asia. Emerging bonds’ premiums over underlying safe assets have snapped in as yields came off recent highs, and as emerging currencies have steadied. Adding to the tailwinds for risk assets has been a steady decline in the dollar in recent weeks.

Betting on a recovery of assets from emerging economies that are on the cusp of reopening whilst still grappling with high or climbing infection numbers - such as Brazil or India, means risks are also high.

(GRAPHIC - Emerging stocks lag: here)

JPMorgan said in its latest global asset allocation note it had added both emerging market equity and fixed income to its model portfolio. Assets outside China, Hong Kong, Taiwan, Korea and Singapore have lagged the recovery so far, the note said.

“We see a good chance of them catching up,” JPM’s Nikolaos Panigirtzoglou told clients. “Our EM position indicators are supportive of a bullish view on EM risky assets.”

So far though, only a fraction of the money which fled has been induced to return. Emerging market bonds and stocks saw inflows of $17.1 billion in April and $4.1 billion last month. However, excluding China, emerging stocks continued to suffer outflows in May.

Much depends on whether developing markets would be able to avoid a widespread pickup in COVID infection rates when emerging from their lockdowns, said Goldman Sach analysts in a recent note.

“If medical outcomes in EMs can continue to avoid left-tail scenarios, our analysis implies tactical upside in EM high yield credit, LatAm equities and EM FX,” Goldman Sachs’ Kamakshya Trivedi said.

However, there are risks in high-yielding countries where infection rates are high, Trivedi added, citing Brazil, Colombia, India, Mexico, the Philippines, Turkey and South Africa.

(GRAPHIC - Emerging currencies enjoy gains in June: here)

These economies still face major hurdles before they can return to growth, which is why many funds are biding their time.

“Large emerging countries like India, Brazil, Mexico where we are still in the early to mid-stage of the spread of virus ... there (it) is still unclear about growth prospects post-COVID, so you have to keep analysing,” said Neeraj Seth, head of Asian credit at BlackRock.

“That is still reflected in our portfolios.”

David Hauner at Bofa noted that emerging local- and hard-currency debt had little risk premium left after the May rally. while several central banks have started pushing back against letting their currencies appreciate.

Slideshow (5 Images)

“EM has rallied hard, and we are starting to worry about complacency,” Hauner added, warning investors to curb their “EMthusiasm”.

And after the torrent of stimulus in the euro zone, United States and China — from central banks as well as governments — there are questions over how much more can be delivered.

“The good news from the big global policy decisions seems priced in by now,” said Hauner.

Reporting by Karin Strohecker; Additional reporting by Saikat Chatterjee; Editing by Alison Williams

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