Picture: ISTOCK
Picture: ISTOCK

Forget the schnapps this season and grab a caipirinha. The new year will usher in a rebound in beaten-up emerging markets, with Brazil leading the charge, a Bloomberg survey shows.

Equities, currencies and bonds of developing economies have found a floor and will likely outperform their developed-nation counterparts in 2019, the survey of 30 investors, traders and strategists by Bloomberg showed. Brazil was the top pick for all three asset classes, with Indonesia another standout. Turkey, with its economy on course for recession, came bottom of the table on two counts.

Key to the anticipated 2019 turnaround is a less aggressive Federal Reserve, which dialled back projections for interest rates and economic growth as it hiked borrowing costs on Wednesday. That offers relief to developing nations that ramped up their dollar borrowing in recent years. A bottoming-out in China’s slowdown and reduced tensions on the trade-war front would also help emerging markets after their worst performance since the 2015 Chinese hard-landing scare.

“With the Fed moving towards the end of its tightening cycle, funds are likely to return to emerging markets,” said Hironori Sannami, an emerging-market currency trader at Mizuho Bank in Tokyo. “But the picture isn’t all that rosy given how the US-China trade friction will remain, keeping investors on their toes. If that trade concern clears up, risk appetite could come back even more.”

For now, emerging stocks are poised for a third straight quarter of declines, though currencies and bonds are enjoying a recovery from mid-year pain. The MSCI Emerging Markets Index of stocks is down 17% so far this year as of 7.33am in London, while MSCI’s currency measure is 4.2% lower. The Bloomberg Barclays index of emerging-market local bonds is down 1.7% since the year began through Wednesday.

Read here what the last survey showed

A majority of respondents in the December 5-December 17 survey expect all three asset classes to rise in 2019, as illustrated in the chart below.

And majorities across the board expect developing-nation assets to do better than developed-country ones, as seen below.

“Emerging-market equities look cheap, relative to developed markets and have underperformed significantly in 2018, so are due for a rebound,” said Daniel Morris, senior investment strategist in London at BNP Paribas Asset Management.

One market that’s less cheap now than it was mid-year is Brazil, where assets have rallied on optimism that the right-wing victor in the country’s presidential election, Jair Bolsonaro, will succeed in pursuing reforms and curbing the debt load of Latin America’s biggest economy. More recently, Indonesian markets have been on the rebound, after the country was battered by a tumbling exchange rate that prompted growth-damping rate hikes.