Investors from Bank Julius Baer & Co. to Pictet Asset Management predict emerging-market assets will extend gains after Lawrence Summers pulled out of contention to be the next Federal Reserve chairman.
The former Treasury Secretary would have reined in Fed stimulus faster than Janet Yellen, his main rival to replace Ben S. Bernanke, according to a Bloomberg Global Poll last week. The central bank’s monthly bond-buying program, which fueled demand for higher-yielding assets worldwide, will probably be cut to $75 billion from $85 billion at a review this week, according to the median estimate of economists surveyed Sept. 6 by Bloomberg.
“The stage is being set for emerging markets to do better and the Summers thing in the short-term can provide some boost,” Stefan Hofer, an economist at Bank Julius Baer, which oversees $406 billion of client assets globally, said in a phone interview. Asia offers the best prospects as there is the added benefit of an improving Chinese economy, he said.
U.S. President Barack Obama said he accepted Summers’ decision. Summers was one of three candidates mentioned by Obama as possible replacements for Bernanke, whose term as Fed chairman ends on Jan. 31. Yellen, the current Fed vice chairman, was also on the list along with Donald Kohn, a former Fed vice chairman.
The MSCI Emerging Markets Index climbed 1.5 percent to the highest level in three months, as stock gauges in Indonesia, the Philippines, Thailand and Turkey advanced more than 2.7 percent. Nineteen out of 24 developing-nation currencies tracked by Bloomberg advanced.
“In the perception of the market, Summers was a hawk and Yellen a dove,” Jan Dehn, London-based head of research at Ashmore Investment Management, which has $77.4 billion under management in emerging markets, said by e-mail. “In reality, it is pretty irrelevant who becomes Fed chair, but having swung one way too far, the market must now swing back the other way.”
Net outflows from emerging-market equity funds peaked at $20.26 billion in June after Bernanke told Congress on May 22 the central bank could scale back the pace of its mortgage bond and Treasuries purchases if the U.S. economy showed sustained improvement, according to data of EPFR Global. Some $2.44 billion left developing-nation equities in July and another $9.15 billion in August, the data show.
The market was prepared “for Summers to come in as the new chairman, and a lot of those positions are now unwinding,” according to Pang Cheng Duan, head of fixed income at Manulife Asset Management (Singapore) Pte, whose parent company manages $247 billion globally.
The Fed’s Federal Open Market Committee will hold a two-day meeting that will start tomorrow to review monetary policy.
With market expectations adjusting to less-aggressive reduction in the Fed’s stimulus, it should lower the immediate risk of capital outflows from Asia, according to a research note written by Rob Subbaraman, a Singapore-based economist at Nomura Holdings Inc. It will provide “significant relief” for nations with current-account deficits such as India and Indonesia and to a lesser extent Malaysia and Thailand, he wrote.
“Today, it is mainly the current-account deficit countries that benefit from the Summers news,” Maarten-Jan Bakkum, a senior emerging-market strategist at ING Investment Management in The Hague, said by e-mail. ING Investment Management oversees about $13.4 billion in emerging markets.
India’s S&P BSE Sensex gained 0.1 percent, its first advance in three days, while the benchmark stock index in Turkey, which posted a larger-than-estimated current account deficit in July, surged 3.7 percent.
“For emerging markets, you can see the re-emergence of some of the higher quality carry trades on the back of a prospect for lower rates for longer,” after Summers’ withdrawal as a candidate to lead the Fed, Masha Gordon, who oversees $2 billion in assets as the London-based head of emerging-market equities at Pacific Investment Management Co., said in phone interview from London today.
The JPMorgan Emerging Markets Currency Index was 5.4 percent lower at the end of last week than on May 22 and a JPMorgan Emerging Markets Bond Index dropped 8.5 percent for the period. The gauges rallied at least 1.2 percent each last week.
“The tapering would probably be at a gradual pace,” Wee-Ming Ting, the Singapore-based head of Asian fixed income at Pictet Asset Management, which oversees $24.3 billion in emerging-market bonds globally, said by phone. “People are worried about Summers’s hawkish stance. With his withdrawal, the market is expecting a higher probability that Yellen will be the next Fed chairman.”