Traders seek growth in emerging markets as recovery angst builds

Bloomberg

Some of the assets most exposed to fears around the spread of the delta variant are luring traders with tempting signals of strength and stability.
Emerging-market corporate earnings have outpaced estimates for the first time in 30 months amid an economic rebound in developing nations. Meanwhile, MSCI’s index of emerging currencies remains up this year, defying the declines seen this month.
Analysts and investors from ING Bank NV and AllianceBernstein are betting on a return to strong risk appetite following the selloff, and see buying opportunities. With a Federal Reserve meeting on the horizon amid mounting inflation concerns in the world’s largest economy, that may seem like a tough wager. But many emerging-market watchers are ready to make that bet.
“The technical side is very, very supportive in the near term,” ING analyst Trieu Pham said in an interview from London. “We are still some way away from US tapering. All this is good for risky assets and should be supportive for emerging markets.”
The recent weakness in emerging-market assets has accompanied a flight to quality that drove US Treasury yields below 1.3%. MSCI’s emerging equity index has crumbled, falling more than 6% so far this month. The index is now floating near oversold territory and has fallen through its 200-day moving average.
As investor attention returns to the growth story and fears of the delta variant are put aside, emerging economies may be primed for a takeoff. US growth has been slowing, with Wall Street strategists concerned that economic growth may have peaked in the second quarter. And according to Bloomberg surveys, emerging-market growth is expected to outpace the developed world, 6.6% to 5.4% respectively.
“Equity investors have favored the US over the last month,” said Morgan Harting, a portfolio manager at AllianceBernstein in New York. “Emerging markets still look to me like that place where investors will find the best-priced earnings growth, and I expect that the continuing rapid pace of vaccination across many EM countries will increase conviction.”
Harting said that he’s specifically betting on electronics manufacturers set to benefit from increased digitalization, as well as banks with strong balance sheets, energy companies with better governance, and metals, mining and auto sectors.
Meanwhile, even some of the most punished assets may be a solid bet coming up. BBVA strategist Danny Fang says that he’s bullish on Latin American currencies, despite them being among the hardest-hit during the selloff.