(Bloomberg) — As the worst quarter for emerging-market dollar bonds in 24 years draws to a close, a deep gap is opening as investors pin their hopes on Middle Eastern commodity exporters. and Latin America.
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Rapidly rising energy and food costs as the war rages on are weighing on the most vulnerable markets, coming in the latest surprise for money managers who entered 2022 expecting inflation to peak as the The Federal Reserve embarked on its tightening cycle.
Now Fed officials are considering large rate hikes of 50 basis points amid high inflation made more damaging by Russia’s invasion of Ukraine. That could make it harder for some low-income, commodity-importing nations to borrow just as costs rise.
“These are tough times for emerging market economies,” said Andrew Tilton and Kamakshya Trivedi of Goldman Sachs. “The economic costs of the Russian invasion of Ukraine and the resulting sanctions are likely to be significant and highly asymmetric.”
The war has also sparked a surge in risk aversion, putting a Bloomberg gauge of emerging dollar debt on track for its worst quarter since the 1998 Asian financial crisis. Stocks are just shy of their biggest quarterly drop since the pandemic began, while three-quarters of emerging currencies tracked by Bloomberg are down.
It’s an important moment for money managers caught off guard by the conflict in Eastern Europe, just two years after the coronavirus sent seismic waves through financial markets.
In the world of emerging debt, the shocks of war and higher energy and food costs have driven a gulf between investment in exporters and importers. The blow has been severe in border economies and those that import food and fuel. Generic oil futures prices are up 22%, gas futures 20% and wheat futures 24% since the war began.
But it also underpins the strength of Latin American exporters, as well as Saudi Arabia, the United Arab Emirates and Nigeria, according to Goldman Sachs.
“Rising inflation, and more particularly food inflation, is giving emerging market finance ministers and central bankers headaches,” said Jean-Dominique Butikofer, head of emerging markets fixed income. at Voya Investment Management.
He warned that the need to subsidize food prices will hit the budgets of commodity importers, especially as the risk of social unrest grows along with households seeing their purchasing power decline.
Nordea Investment has changed its strategy accordingly to buy commodity exporters while selling to importers, said Witold Bahrke, senior macro strategist at the Copenhagen-based firm. He said that they bought Colombia and sold Egypt.
Still, for Charlie Robertson, chief global economist at Renaissance Capital Ltd. in London, the weakness of those importers could actually be an opportunity.
“What I would be tempted to do is bet big on the energy importers: Pakistan, probably Turkey, whoever imports a lot of oil and is being beaten now,” he said. “They are cheap and getting cheaper, and from here it is very easy to extrapolate a deep deterioration.”
Other investors are playing straight. Claudia Calich, a fund manager at M&G Investments, likes higher-yielding oil exporters in Africa and the Middle East, as well as Latin American credits that are tied to the US economy, such as Mexico.
Here are the main things to watch in emerging markets in the coming week:
Investors will watch Sri Lanka’s gross domestic product data for the final quarter of 2021 for clues about the economic recovery after a contraction in the third quarter.
The Bank of Thailand is likely to keep its key interest rate steady at 0.5% on Wednesday, according to economists surveyed by Bloomberg.
While Russian activity data for February will not capture many disruptions from the Ukraine invasion and subsequent sanctions, traders will monitor weekly price data for more clues about the environment in March.
In China, official manufacturing PMIs may show a setback for the economy after a strong first two months of the year, according to Bloomberg Economics.
Brazil is expected to publish a large amount of economic data, including industrial production figures and trade balance figures.
Chile’s central bank is likely to raise its key interest rate by 150 basis points to 7% on Tuesday, according to Bloomberg Economics, followed by a 150 basis point hike by Colombian policymakers expected on Thursday to 5.5. %.
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