Traders Tiptoeing Into May Dial Back Emerging-Market Bull Case

(Bloomberg) -- Emerging-market investors head into the first week of May with as many reasons to be gloomy as cheerful.

For all the support emanating from U.S. stimulus plans, dovish central banks and rising commodity prices, worries over India’s deepening Covid-19 crisis, escalating U.S.-Russia tensions and China’s Huarong debt saga may give buyers pause. Traders have become less bullish about the outlook for developing nations amid increasing inflation concerns, and most who sought refuge in cash aren’t ready to put it to work, according to a survey by HSBC Holdings Plc.

“Emerging markets will continue to be torn between positive tailwinds from the U.S. economic recovery and the very difficult infection situation in countries such as Brazil and India,” said Tai Hui, chief Asia market strategist at JPMorgan Asset Management in Hong Kong. “A stronger U.S. recovery could also bring potential inflation and higher yields, which may cap the progress of markets that are traditionally vulnerable to rising Treasury yields.”

Morgan Stanley said it favors emerging-market local debt over currencies as developing-nation central banks will probably refrain from tightening too much. Meantime, Deutsche Bank AG predicts the Chinese yuan may rally further on strong inflows while recommending a cautious stance on the Turkish lira.

While April proved a positive month for emerging markets, with bonds and currencies posting their first monthly gains of 2021, history suggests potential challenges ahead. May was a losing month for developing-nation stocks, currencies and local bonds in at least seven of the past 10 years, according to data compiled by Bloomberg.

Central-bank decisions from Thailand to Turkey and Brazil this week could help investors decide whether now is the time to buy.

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What Else to Watch

• Nations across the developing world, from India to South Africa and Brazil, will announce manufacturing PMI for April on Monday
• Indonesia will release CPI data on Monday and South Korea publishes its own figures on Tuesday, while the Philippines and Thailand disclose theirs on Wednesday and Taiwan follows on Thursday
• Indonesia posts first-quarter GDP data Wednesday. Southeast Asia’s largest economy likely shrank 1% from a year earlier, an improvement from the 2.2% fourth-quarter decline, according to a Bloomberg survey. The rupiah is one of this year’s biggest losers in Asia
• South Korea will report current-account figures for March on Friday. The surplus widened to $8 billion in March from $7 billion in February
• China’s trade figures, due Friday, will show the extent of the nation’s economic recovery
  • Reports on foreign reserves, the current-account balance and the Caixin PMI services gauge will be published the same day. The yuan has strengthened almost 1% this year
• Taiwan will issue trade data on Friday. Expanding exports have helped the local dollar appreciate 2% this year, the best performer in emerging Asia
• The Philippines will release trade statistics on Friday
• Russian inflation probably decelerated in April but remains well above the central bank’s 4% target
• Chile’s economic-activity gauge on Monday may show an increase in March from a year earlier, according to Bloomberg Economics
  • On Friday, traders will watch April CPI data for signs that inflation is rising
• In Mexico, April CPI data released Friday will probably show a jump from a month earlier, according to Bloomberg Economics

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