Valuation Caution Returns as Emerging Markets Face 2021 Reality
Bloomberg 1/4/2021 Farah Elbahrawy, Simon Flint and Sydney Maki
(Bloomberg) Rarely, if ever, can a year have started with price levels in emerging markets looking so divorced from the fundamental backdrop.
Rising Covid-19 case numbers and uneven rates of recovery in the biggest of the developing economies underscore a nagging concern that this will be about as good as it gets for stocks, bonds and currencies. Currencies surged to a record earlier on Monday as the dollar slid. The relative strength index on MSCI Inc’s emerging-market equities gauge is above 70, suggesting the market is in overbought territory. The average yield on local-currency debt is less than 20 basis points above the all-time low of 3.46% reached in May.
Rising Covid-19 case numbers and uneven rates of recovery in the biggest of the developing economies underscore a nagging concern that this will be about as good as it gets for stocks, bonds and currencies. The relative strength index on MSCI Inc’s emerging-market equities gauge is above 70, suggesting the market is in overbought territory. The average yield on local-currency debt is less than 20 basis points above the all-time low of 3.46% reached in May.
The fact remains though that with central-bank stimulus efforts and vaccine roll-outs providing comfort, most investors are confident the rally has further to run. Emerging-market economies will post an average fourth-quarter growth rate of 2.2%, according to a Bloomberg survey, though many see the efficacy of inoculation programs as a key driver for sentiment. The World Bank’s Global Economic Prospects report on Tuesday is set to provide further clues on the pace of recovery.
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The New Poor
Over the past 12 months, the pandemic has harmed the poor and vulnerable the most, and it is threatening to push millions more into poverty. This year, after decades of steady progress in reducing the number of people living on less than $1.90/day, COVID-19 will usher in the first reversal in the fight against extreme poverty in a generation. In a worst-case scenario, the figure could be as high as 115 million. The World Bank Group forecasts that the largest share of the “new poor” will be in South Asia, with Sub-Saharan Africa close behind. According to the latest Poverty and Shared Prosperity report, “many of the new poor are likely to be engaged in informal services, construction, and manufacturing – the sectors in which economic activity is most affected by lockdowns and other mobility restrictions.”