Evergrande Fallout mocks emerging markets over Fed

(Bloomberg) – The chorus of emerging market bears intensifies as the China Evergrande group debt crisis turns an already risky week into a minefield.

Fidelity International and Nordea Investment expect developing country currencies to weaken further as the real estate giant’s financial saga reveals flaws in China’s growth engine. Citigroup Inc. now favors long dollar bets in Poland, Hungary, South Africa and Turkey, while Morgan Stanley said it is sticking to a bearish view of dollar debt amid the uproar .

The fallout comes at a fragile time for investors in the developing world. They are bracing for the Federal Reserve to remove stimulus measures amid signs that the global economic rebound from the pandemic is fading. Any risk reversal would only be aggravated by a potential default by the Chinese group Evergrande, sending shock waves through the financial system.

This combination of headwinds “is not a healthy cocktail for emerging market risk,” said Paul Greer, a London-based fund manager at Fidelity International, whose developing country debt fund outperformed 95%. of its peers this year. “We expect emerging markets to stay behind until the end of the quarter at least.”

Fidelity International has reduced its exposure to developing currencies, Greer said, adding that spreads on most emerging market dollar debt were not enough to offset the risks.

So far, equities have been the hardest hit, down nearly 4% this month, against a 0.4% drop in dollar debt of emerging market borrowers. MSCI Inc.’s developing currency gauge fell 1.7% from an all-time high in June.

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“Everything is nothing against the Evergrande saga right now,” said Witold Bahrke, Copenhagen-based senior macro strategist at Nordea Investment. “We doubt the Fed is prepared to remedy the Evergreat Market Malaise in the near term.”

Commodity-linked currencies such as the Colombian and Chilean pesos and the Brazilian real are the most vulnerable, he said.

For some, this week’s rout offers an opportunity to buy undervalued stocks. JPMorgan Chase & Co. strategists led by Marko Kolanovic told clients they “maintain a pro-risk allocation” in their portfolio of emerging market models geared to “cyclical sectors focused on reopening and reflation.”

Nonetheless, the number of MSCI Emerging Markets Index stocks with a sell signal, based on the moving average convergence-divergence model, jumped to levels last seen in January.

“It’s hard to see the Evergrande debacle going away in the very near term,” said Greer of Fidelity International. “At the same time, the Fed’s gradual push towards reducing QE, while not unexpected, will always provide another headwind for the market.”

© 2021 Bloomberg LP

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