Emerging-Market Investors Looking to Policy Makers for Answers

  • Goldman Sachs sees buying opportunity, BofA plays defensively
  • Reaction in South Korea and China in focus, analysts say

Emerging Market Stocks Enter Correction

Emerging-market investors took it on the chin last week, and will be hyper-vigilant about what comes next as volatility roars back to life.

All eyes will be on any responses by policy makers to the rout in stocks, currencies and bonds that has gripped much of the world. South Korean officials may try to stabilize the won to boost spirits as the country hosts the Winter Olympics, according to Woori Bank. Brazilian traders -- who will be spending the start of the week at Carnival celebrations -- want to know if the selloff will impact the central bank’s plan to wrap up the easing cycle.

The MSCI Emerging Markets Index closed Friday 10 percent below its recent peak. While Goldman Sachs says the selloff offers attractive re-entry points in equities, Bank of America Merrill Lynch prefers to play defensively on concern the correction will continue.

“We think the increase in volatility is here to stay,” strategist Claudio Irigoyen wrote in a note.

Winter Olympics, Chinese New Year and Intervention

Chinese equities were the hardest hit in Asia last week, with the Shanghai Composite Index down 9.6 percent and the Hang Seng China Enterprises Index falling 12 percent. Whether authorities will act to stem further losses is the big question this week, which will be shortened by the Chinese New Year holidays. Zhang Haidong, a fund manager at Jinkuang Investment Management, says a government rescue attempt would be too expensive, given that valuations are still relatively high.

The Winter Olympics in Pyeongchang will captivate sports fans this week, but they’ve also already eased geopolitical tension on the peninsula and look set to have an impact on financial markets. Authorities may make some efforts to stabilize the won, which has dropped 2.6 percent against the dollar over the past two weeks, to take the attention off the currency during the games, according to Min Gyeong-won, an economist at Woori Bank in Seoul. Airline, apparel and advertising stocks are also poised to benefit.

Scan the Brazilian minutes

Brazilians usually say the year only starts after Carnival and with markets closed for half of the week -- from Monday to Wednesday 10 a.m. -- the main event of the week is scheduled for Thursday, when currency and rates traders will scan the central bank minutes for clues on what could spur another rate cut and how the global selloff impacts the outlook for monetary policy. The authority last week signaled the end of the easing cycle as it took the benchmark rate to a record low amid the global turmoil. The real weakened 2.5 percent and now the top forecasters for the currency are split on the path forward.

Searching room for new bonds

Nigeria, Kenya and Ghana are all mulling Eurobond sales. Low yields for emerging-market debt will likely also draw Ivory Coast to the market this quarter, but Kenya’s issuance will come against a backdrop of political instability that started six months ago with an annulled election.

Also Hungary’s policy of unconventional easing faces its latest test on Thursday at an auction of interest-rate swaps. Despite the global mood, the country’s bond markets now look to have stabilized after the selloff over the last three weeks.

Finally, the South African saga

While the global market turmoil has slowed the rand’s gains, the currency is still up 18 percent in the past three months, the most among peers by a long stretch, and it jumped on Friday as speculation swirled that President Jacob Zuma’s exit from office is drawing near. The African National Congress’s leadership is trying to wrap up a deal for Zuma to resign so that Cyril Ramaphosa, who became the party leader in December, can restore investor confidence and public support for the ANC as it gears up for elections next year.

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