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Bloomberg

Bets on emerging market rate hikes turn excessive, funds say

(Bloomberg) – When it comes to betting on higher borrowing costs in developing countries, some investors may be getting ahead of themselves. increases that what economists say is currently justified on the basis of the inflation outlook. “Almost all of them are overvaluing the tightening,” said Shamaila Khan, head of emerging market debt at AllianceBernstein in New York City, whose 4.7 billion high yield bond fund peers 86% over the course of the year. The positioning reflects a common motive in the markets: After months of Covid-19 lockdown, there is a risk that policymakers will heat up their economy, only to turn back the clock with sharper rate hikes provided that. But the debate carries additional weight in emerging markets, an asset class that is particularly sensitive to the Federal Reserve’s position. This suggests how trades could proceed quickly if there is any sign of loose policy, which could reward investors keen to look beyond the bearish outlook.In Mexico, for example, market prices for swaps suggest that a upward cycle could start as early as August, although the majority of economists say the central bank will refrain from tightening until at least February. It’s a similar story in South Africa, where forward rate agreements provide for a 70% chance of a 50 basis point jump in six months, while Bloomberg’s monthly survey shows the rate remains unchanged until the end of the year, while forward rate deals Korea’s forecast a rate hike of nearly 25 basis points over the next six months. In contrast, most economists do not foresee any change. In this context, Khan of AllianceBernstein said that his fund favors the local debt of South Africa, Mexico and Russia, “where the markets have taken too much into account the trajectory of key rates”. Officials may be able to start discussing when to cut back their bond buying program at upcoming policy meetings, Fed Vice Chairman Richard Clarida said last week. Ghana’s central bank defied expectations on Monday by lowering its benchmark interest rate to the lowest in more than nine years. The Chilean Monetary Authority said the timing of the start of interest rate hikes remained uncertain due to factors such as an uneven recovery and a weak labor market. In India, traders canceled their bets on the hike rates last month as policymakers turned to a bond. purchasing program to support the economy against a new wave of infections. The Reserve Bank of India is expected to keep its benchmark interest rate unchanged on Friday and announce further debt purchases as the economy grapples with localized lockdowns implemented by most states. Prices suggest there is value in the front end of the yield curve, including in South Korea and Poland. This is a view shared by Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen Asset Management in London. “We are long in South Africa and Mexico because we think the price curve is in a rate hike path that is not likely,” he said. Market correction This is not to say that caution is not warranted. The Citi EM Inflation Surprise Index is at its highest since 2008, a reminder of the number of investors caught off guard by the resurgence of inflation. “The risks are likely tilted towards a faster tightening rather than a slowdown,” said Duncan Tan, strategist at DBS Bank Ltd. in Singapore. Inflation data from South Korea to Turkey and Poland this week may offer clues on the way to monetary policy. In Mexico, traders will be watching the central bank’s quarterly inflation report on Wednesday for signs that the monetary authority may take a less accommodative outlook. a correction, “said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore.” The market is already forecasting more hikes than fundamentals suggest, “she said. Reserve Bank of India is expected to keep its benchmark interest rate at 4% to help prop up the economy after a spike in coronavirus infections that has weighed on growth Investors will seek comment on debt purchases, which were pegged at 1 trillion rupees ($ 13.8 billion) this quarter. Bloomberg Economics expects bond purchases to amount to around Rs 1 trillion to Rs 1.5 trillion for the third quarter of the current fiscal year, and the introduction of additional liquidity measures to support small and medium-sized businesses. Monday, which should show that a recovery was underway before the latest wave of viral infections. The rupee has strengthened around 2% this month, Asia’s best performance South Korea’s retail sales and services output hit record levels in April, contrasting with industrial output which recorded second month-on-month contraction China reported on Monday that its tolerance for the yuan rebound is fading after authorities set the daily fixing rate lower than expected and state newspapers warned of quick gains A gauge of China’s manufacturing industry changed little in May, suggesting that the economy’s recovery momentum may have peaked for now , according to data from Monday. The yuan surged beyond key levels that have held over the past three years last week Inflation data for May comes from Indonesia and South Korea on Wednesday, while Thailand and the Philippines reports expected monthly trade figures on Tuesday Underlying strength in external demand likely remained robust even after removing base effects, according to Bloomberg Economics. Exports likely rose around 13% from May 2019, he said, Turkey’s CPI data will be closely watched on Thursday after the lira fell to an all-time high on Friday, fearing that monetary policy remains too loose to curb accelerating inflation Consumer prices likely rose 17.3% in May following a recent fuel tax hike, from 17.1% % last month Turkey’s economy has grown at a steady pace this year, outperforming most major economies as it recovers from the pandemic – an expansion that has come at the expense of price stability and economic growth. change. Gross domestic product rose 7% from a year earlier and 1.7% from the fourth quarter A reading of Brazilian gross domestic product figures for the first quarter on Tuesday will be closely watched by investors assessing the scale of the recovery versus the risks associated with financing needs and the country’s skyrocketing. Industrial production data, which will be released on Wednesday, is expected to provide the first aggregate reading of second-quarter growth, according to Bloomberg Economics. The real was the best performer in Latin America in May An indicator of Chile’s economic activity in April, expected on Tuesday, is likely to rise from a year earlier as growth benefited from expansionary fiscal and monetary policies, according to Bloomberg Economics Peruvian inflation through May is expected to be relatively stable, according to Bloomberg Economics. Investors will watch the nation’s assets as a high-stakes presidential election draws near Default and restructuring Argentina will delay paying a $ 2.4 billion debt with the Paris Club that is due on Monday and will instead use a 60-day grace period to try to make a deal with the Paris Club. Belize bondholders have until Tuesday to agree to extend the grace period on an interest payment due last week through September. The country’s dollar bonds have the worst yield on average this year among emerging market sovereign bonds tracked in a Bloomberg Barclays index Suriname to outline the elements and principles of its debt restructuring plans on Wednesday More stories like this are available on bloomberg.com the most reliable source of business information. © 2021 Bloomberg LP



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