Emerging markets seek next catalyst as dust of midterms settles

By Lilian Karunungan and Netty Ismail

As the results of the U.S. midterm elections became clearer, investors began reassessing opportunities in emerging markets amid a slew of headwinds from President Donald Trumps trade policies to the end of easy money.

An MSCI index of emerging-market currencies rose as the dollar stayed on the back foot, with a divided Congress emerging as the most likely result after Republicans retained control of the Senate and the Democrats looked poised to wrest control of the House. While investors are likely to welcome the removal of the uncertainty surrounding the vote, focus is now shifting to possible policy gridlock amid an escalation of the U.S.-China trade friction and further removal of stimulus by the Federal Reserve.

“Investors are going to be relieved to have midterm election news out of the headlines,” said Hannah Anderson, a global market strategist at JPMorgan Asset Management in Hong Kong. Still, with the midterm results, “nothings going to change on the trade front. Fears and sentiment about trade are going to continue to be reflected across the EM complex, at least for the next couple of months.”

Nicholas Ferres, chief investment officer at Vantage Point Asset Management in Singapore:

“The developments today might take the sting out of the dollar risk for EM”
The fund scaled up its wagers on Chinese and other developing-nation equities after the October sell-off, before taking some profit as the market bounced this month
It maintains a “positive tactical bias” on emerging markets
“I am not aggressively bullish EM” amid concerns about the deteriorating growth outlook
The fund also added a net long position in 30-year U.S. Treasuries

Saed Abukarsh, the co-founder of Dubai-based hedge fund Ark Capital Management:

“We are looking at a consolidation in EM and further gains in the Mexican peso and South African rand”
The fund holds “small” wagers that seek to profit from gains in the peso and rand
“The House/Senate vote was priced in. The real cat in the hat is the Fed, and the risk is that we could see the back end of the curve dip again”
“The risk is that the Fed may begin to rein in their language on potential future hikes in 2019. The risk is that the Fed takes a strong look at the housing numbers and begins to make that a focal point”

Jan Dehn, head of research at Ashmore Group in London:

“The most obvious implication for EM is that the second of three major risks, which have been holding back investors from returning to EM local markets in the second half of 2018, is now behind us”
The first of these risks was the Brazilian election, and the final one for the year is position squaring, which typically occurs toward year-end but unlikely to have lasting or fundamental implications
“The green light for EM local markets just got significantly greener”
As politicians begin to focus on the 2020 election and seek to keep the U.S. economy buoyed, Republicans will likely push the Trump administration to pursue more cautious economic policies, particularly on trade
Investors should lower their U.S. growth expectations, as the Fed may do so with the reduced likelihood of large stimulus measures; the probability of recession is also higher, at the margin
“These factors will weigh on the dollar and support EM currencies”

Arthur Lau, Hong Kong-based co-head of EM fixed-income at PineBridge Investment:

This is likely to be positive for emerging-market bonds which have suffered since President Trump came into power
If the U.S. dollar softens, or it strengthens at a slower pace, this will help local currencies, for example Indonesias rupiah, which has rallied
Trumps implementation of tax cuts is likely to be “challenging,” reducing the positive impact on the U.S. economy

Mitul Kotecha, senior emerging-markets strategist in Singapore at TD Securities:

A divided Congress is unlikely to change the outlook for emerging markets “significantly” as the Trump administration retains a lot of power over trade policy
Should a split Congress result in less dollar bullishness at a time when positioning is heavily long, this could help emerging-market currencies eventually

Shane Oliver, head of investment strategy in Sydney at AMP Capital Investors Ltd.:

“It all depends on how Trump reacts, because he might regard the loss of control of the House as a negative, which could mean he becomes even more extremist and dial up the populism even further”
“Thats probably the biggest risk, which could possibly mean that he goes in even tougher in terms of dealing with China”

Samsara Wang, emerging-market strategist at Credit Agricole CIB in Hong Kong:

The result is expected to support emerging markets as Trumps political power will weaken and there is less likelihood he will take a tougher stance against China
If the U.S. and China agree to a trade deal at the Group of 20 meeting at the end of November, it will boost developing-nation assets further, especially the yuan
The market is set for a “short period of consolidation,” with the Fed likely to keep rates on hold on Thursday before hiking again in December

Hamish Pepper, head of FX and emerging-market macro strategy research for Asia at Barclays Plc in Singapore:

The dollar is expected to continue to strengthen against emerging-market currencies while remaining range-bound against its Group-of-10 peers
Additional fiscal stimulus is unlikely to come under a divided Congress, with Barclays assigning a small probability to bipartisan support for a modest infrastructure plan
But the U.S. economy should continue to outperform the rest of the world as the boost from the current fiscal expansion remains

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