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Half of Emerging-Market Bond Index Faces Election Risk in 2018

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Emerging Markets
  • Half of Emerging-Market Bond Index Faces Election Risk in 2018

Investors set to bag the best returns in five years from emerging-market bonds this year should brace themselves for 2018. Political risk looms large.

Countries that make up more than 50 percent of a Bloomberg Barclays developing-nation local bond index are gearing up for elections in the next 12 months.

While the outcomes of votes in countries like Russia are predictable, tight contests in heavyweights like Brazil and Mexico have potential to cause bouts of volatility. That may catch some investors off-guard after they piled into emerging-market assets this year in search of higher returns as yields in developed markets grind ever lower.

“Investors are definitely beginning to think about this stuff, but I suspect they aren’t prepared,” said Kieran Curtis, a money manager at Aberdeen Standard Investments in London. “Brazil’s election isn’t until the end of the year, but it’s still somewhere that asset managers are holding quite a lot of risk.”

If history is anything to go by, traders need to start getting their act together. A report published by Citigroup Inc. earlier this month that detailed the election risks over the next 18 months in 20 countries concluded that elections have played a crucial role in the timing of “things going wrong” in emerging markets.

Analysts at the bank highlight financial crises in Mexico in the ’70s, ’80s and ’90s, which all coincided with elections, and midterm votes in Argentina in 2001, which helped pave the way for the country’s default a few months later. Uncertainty over Brazil’s 2002 election caused spreads on the nation’s debt to surge as high as 2,450 basis points, they said.

“It is certainly not the case that there is an ‘election curse’ or that every election is bound to create volatility,” said the analysts including David Lubin. “But there has, historically at least, been some loose connection between elections and crisis.”

Lubin and co. single out elections for South Africa’s ruling party, and general elections in Brazil and Mexico, as having the biggest potential to move markets because all three face tight and unpredictable contests. They recommend investors hedge against currency volatility by taking an overweight position on the dollar three to four months before the elections.

Fiscal deterioration from pre-election policy loosening is possible in South Africa, Indonesia, Pakistan and Costa Rica, they said. A deterioration of debt-to-GDP ratios in “a fairly large number of countries that are going to the polls” might make the market less tolerant about pre-election fiscal loosening than might otherwise be the case, according to the Citi report.

More to Come

The first round of Chile’s presidential elections on Sunday gave investors a warning signal for the possible volatility to come. The peso plunged more than any other currency in emerging markets on Monday after market favorite Sebastian Pinera took a smaller-than-expected lead, putting victory in the final round next month at risk.

Colombia’s presidential election could be “interesting” if it changes the outlook for the country’s sluggish growth, according to Aberdeen Standard’s Curtis. Predictable outcomes in polls in Russia, where Vladimir Putin is expected to run without much opposition, and Malaysia, where the current prime minister is the favorite to win, are unlikely to have much market impact, he said.

Curtis’s preferred strategy for dealing with election risk is to buy bigger stakes in “hideout” countries that have recently passed unscathed through an election cycle. His top pick is Argentina, where market-friendly President Mauricio Macri’s allies cruised to victory in October’s congressional elections. Russia could also be a good option once its vote is over in March, he said.

“It will be a big plus for Argentina to have all of its political issues settled next year, especially since they have a big debt-issuance program,” Curtis said. “Investors will probably start to take pre-election positions as we enter the new year.”

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Brent Crude Oil Approaches $70 Per Barrel on Friday

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Crude oil

Nigerian Oil Approaches $70 Per Barrel Following OPEC+ Production Cuts Extension

Brent crude oil, against which Nigerian oil is priced, rose to $69 on Friday at 3:55 pm Nigerian time.

Oil price jumped after OPEC and allies, known as OPEC plus, agreed to role-over crude oil production cuts to further reduce global oil supplies and artificially sustain oil price in a move experts said could stoke inflationary pressure.

Brent crude oil rose from $63.86 per barrel on Wednesday to $69 per barrel on Friday as energy investors became more optimistic about the oil outlook.

While certain experts are worried that U.S crude oil production will eventually hurt OPEC strategy once the economy fully opens, few experts are saying production in the world’s largest economy won’t hit pre-pandemic highs.

According to Vicki Hollub, the CEO of Occidental, U.S oil production may not return to pre-pandemic levels given a shift in corporates’ value.

“I do believe that most companies have committed to value growth, rather than production growth,” she said during a CNBC Evolve conversation with Brian Sullivan. “And so I do believe that that’s going to be part of the reason that oil production in the United States does not get back to 13 million barrels a day.”

Hollub believes corporate organisations will focus on optimizing present operations and facilities, rather than seeking growth at all costs. She, however, noted that oil prices rebounded faster than expected, largely due to China, India and United States’ growing consumption.

The recovery looks more V-shaped than we had originally thought it would be,” she said. Occidental previous projection had oil production recovering to pre-pandemic levels by the middle of 2022. The CEO Now believes demand will return by the end of this year or the first few months of 2022.

I do believe we’re headed for a much healthier supply and demand environment” she said.

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Crude Oil

Oil Jumps to $67.70 as OPEC+ Extends Production Cuts

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opec

Oil Jumps to $67.70 as OPEC+ Extends Production Cuts

Brent crude oil, against which Nigerian oil is priced, rose to $67.70 per barrel on Thursday following the decision of OPEC and allies, known as OPEC+, to extend production cuts.

OPEC and allies are presently debating whether to restore as much as 1.5 million barrels per day of crude oil in April, according to people with the knowledge of the meeting.

Experts have said OPEC+ continuous production cuts could increase global inflationary pressure with the rising price of could oil. However, Saudi Energy Minister Prince Abdulaziz bin Salman said “I don’t think it will overheat.”

Last year “we suffered alone, we as OPEC+” and now “it’s about being vigilant and being careful,” he said.

Saudi minister added that the additional 1 million barrel-a-day voluntary production cut the kingdom introduced in February was now open-ended. Meaning, OPEC+ will be withholding 7 million barrels a day or 7 percent of global demand from the market– even as fuel consumption recovers in many nations.

Experts have started predicting $75 a barrel by April.

“We expect oil prices to rise toward $70 to $75 a barrel during April,” said Ann-Louise Hittle, vice president of macro oils at consultant Wood Mackenzie Ltd. “The risk is these higher prices will dampen the tentative global recovery. But the Saudi energy minister is adamant OPEC+ must watch for concrete signs of a demand rise before he moves on production.”

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Gold

Gold Hits Eight-Month Low as Global Optimism Grows Amid Rising Demand for Bitcoin

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Gold Struggles Ahead of Economic Recovery as Bitcoin, New Gold, Surges

Global haven asset, gold, declined to the lowest in more than eight months on Tuesday as signs of global economic recovery became glaring with rising bond yields.

The price of the precious metal declined to $1,718 per ounce during London trading on Thursday, down from $2,072 it traded in August as more investors continue to cut down on their holdings of the metal.

The previous metal usually performs poorly with rising yields on other assets like bonds, especially given the fact that gold does not provide streams of interest payments. Investors have been jumping on US bonds ahead of President Joe Biden’s $1.9 trillion coronavirus stimulus package, expected to stoke stronger US price growth.

We see the rising bond yields as a sign of economic optimism, which has also prompted gold investors to sell some of their positions,” said Carsten Menke of Julius Baer.

Another analyst from Commerzbank, Carsten Fritsch, said that “gold’s reputation appears to have been tarnished considerably by the heavy losses of recent weeks, as evidenced by the ongoing outflows from gold ETFs”.

Experts at Investors King believed the growing demand for Bitcoin, now called the new gold, and other cryptocurrencies in recent months by institutional investors is hurting gold attractiveness.

In a recent report, analysts at Citigroup have started projecting mainstream acceptance for the unregulated dominant cryptocurrency, Bitcoin.

The price of Bitcoin has rallied by 60 percent to $52,000 this year alone. While Ethereum has risen by over 660 percent in 2021.

 

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