This year, emerging markets will not face the usual difficulties of May and June, as more robust US growth can support the global economy, predicts Goldman Sachs Group Inc.
"According to our baseline scenario, EM growth (like the global one) will continue to gain momentum, which, we believe, will support the upward dynamics of the assets, the strategy of Ron Gray and Cesar Maasri write in the April 25 review. "However, considering that a strong rally from the beginning of the year is traditionally for this time, we consider it important to keep in mind the trend that led to the saying "sell in May and rest'," the strategists say.
Assets of developing countries, including stocks, currencies and local government and corporate bonds, tend to show positive returns in the first four months of the year, and in May and June they move to a negative trend, the survey says. Currencies are particularly hard hit in the second quarter.
Goldman expects US growth data to help mitigate seasonal issues.
"Growth tends to accelerate from fourth to the first quarter and slow down from the first to the second quarter," strategists write. "But we still expect the global economy to accelerate in the second quarter, mainly due to stronger US growth, which, in our opinion, should mitigate the seasonality factor that we have seen in the second quarter more than a year."
The Fed will put the greenback on autopilot till 2020.
The US Federal Reserve will not lower the interest rate if core inflation slows, according to a survey by economists conducted by Bloomberg. At the same time, investors expect to reduce the cost of borrowing this year.
The target range of the federal financing rate will remain at the current level of 2.25-2.5% until the end of 2020, according to a consensus forecast of survey participants from April 23-25. Only two of 39 economists surveyed predict a rate cut in 2019. However, interest rate futures quotes suggest that investors estimate the likelihood of US monetary policy easing by December at almost 60%.
At the same time, both economists and market participants predict that the Fed will leave rates unchanged following a two-day meeting next week. The message of the Fed will be published on May 1 at 21:00 Moscow time, and in half an hour there will be a press conference of chairman Jerome Powell. Before the June meeting, the regulator will not update quarterly forecasts, including in its "scatter chart".
Economists do not expect that the Fed will hasten to raise or lower the cost of borrowing in the event of a change in the situation in the economy; it follows from the survey. "The Fed will not make sharp moves in the foreseeable future," said Ryan Sweet, head of monetary policy analysis at Moody's Analytics Inc.
According to him, in the coming months, the Fed will be guided mainly by inflation, taking into account concerns about price pressure, which was below the target of 2%. However, Suit does not expect that a further reduction in core inflation will force the central bank to lower the rate unless the slowdown in price growth is too significant and drags on.
Economists also rejected a statement about the influence of Donald Trump on the Fed: 69% of respondents said that frequent criticism of monetary policy by the president did not affect the decisions of the central bank.
Hedge funds bet on Russian Rouble and EM currencies.
Local bonds in Russia, Indonesia and Colombia, are among the most attractive assets in the world, says the founder and chief executive officer of the global macro hedge fund worth $420 million, which looks to emerging markets amid the extinction of risk.
Saeed Haydar said in an interview that emerging markets have once again attracted his attention after inexpressive dynamics for much of this decade. Slowing economic growth in China, a legacy of the financial crisis and poor governance in countries, including Turkey, Brazil, Argentina and Malaysia, have put pressure on EM markets. Now the influence of these negative factors is waning, he said.
“EM had a lost decade,” said Haidar. “On the whole, the statement that these markets can have the fundamental potential for some growth is correct.” The Jupiter fund, managed by Haidar Capital Management, brought investors 8.1% in 2018 thanks to long positions in Australia and New Zealand and short positions in the United States, the United Kingdom and Canada, a source familiar with the situation said. Other comparable funds lost an average of 6% last year. A Haidar Capital Management spokeswoman declined to comment on the results of the fund.
Haydar sees the potential of Chinese A-Class stocks, as well as the ruble, the Indonesian rupiah and the Colombian peso and bonds in these currencies. Hungary looks less attractive considering the pigeon’s central bank policy, and Turkey and India may face difficulties if oil prices continue to rise, he said. Nevertheless, Haydar says that the curry in Turkey is too high to take short positions on the lira.
Russian Central Bank promised to lower the interest rates.
The Board of Directors of the Bank of Russia, following a meeting on Friday for the third time in a row, did not change the parameters of monetary policy.
The key rate of the Central Bank, which determines the profitability of investments in rubles and the cost of loans in the economy, remained unchanged - 7.75% per annum.
The acceleration of inflation due to the increase in VAT "in March was a local peak," says the release of the Central Bank: at the level of consumers, price increases in April slowed from 5.3% to 5.1%. This is “slightly below the forecast,” the central bank states, expecting that inflation could accelerate to 6%.
“Growth in consumer demand” helped keep growth, the Central Bank points out: real incomes of Russians collapsed in the first quarter by 2.9% after a decline of 8.3% over the previous five years. The average check, according to Romira, grew by only 1.2% yoy in March, and in real terms - taking inflation into account - declined by almost 4%. At the same time, in large cities, people squeeze spending even in nominal terms: the average bill in Moscow collapsed by 2.9%, and in St. Petersburg - by 5.3%.
“Short-term pro-inflation risks have decreased,” notes the Central Bank: this will allow resuming the decline in interest rates in the second or third quarter. Risks for such a scenario are still coming from the outside, the regulator believes: “Geopolitical factors can lead to increased volatility in global commodity and financial markets and affect exchange rate and inflation expectations.”
The decision of the Central Bank plays into the hands of foreign investors in the state debt market, says Rosbank analyst Yury Tulinov: the lower the interest rates, the higher the price of Russian government bonds. In fact, the central bank announces the growth of quotations of government securities. “This signal will support the demand for government bonds, which do not fully take into account the forthcoming easing in prices, and, accordingly, support the ruble,” notes Nordea economist Tatyana Evdokimova.