Commodity Boom Dwarfs Oil Spat as Emerging Markets Set to Win

(Bloomberg) —

For some of the world’s biggest money managers, the OPEC+ oil-price feud is little more than a sideshow when it comes to emerging markets.

Investors and strategists at JPMorgan Chase & Co. and Goldman Sachs Group Inc. say the post-pandemic economic recovery will stoke demand for raw materials across the board, buoying commodity-sensitive assets regardless of whether a crude accord is reached. Russia and Colombia are among the countries that stand to benefit in particular, according to Whitney Baker, the New York-based founder of Totem Macro, which advises funds overseeing more than $3 trillion.

“A generational opportunity exists today in many of the deepest-value emerging markets,” said Baker, the former head of emerging-market research at Bridgewater Associates. “Whether you export goods or whether you export commodities, you’re getting an external demand boom right now for pretty much whatever it is that you sell.”

Investors are looking beyond the spat between Saudi Arabia and the United Arab Emirates and the danger that 2020’s oil production free-for-all will be replayed. The global surge in demand for everything from copper to clothes as economies pick up steam amid the vaccine rollout will provide a backstop for many developing nations, they say.

OPEC+ Spat Is Not the Main Thing for EM Currencies Right Now

Cheap valuations and hawkish central banks will support currencies with the closest ties to oil’s moves should a slump in crude materialize. Front-loaded tightening cycles in Russia and Mexico make those countries’ currencies especially appealing, Chris Turner, the head of currency strategy at ING in London, said on Bloomberg TV.

That sentiment was echoed by Goldman strategists including Zach Pandl and Kamakshya Trivedi, who flagged value in Russia’s ruble, Mexico’s peso and Brazil’s real, despite the past week’s volatility.

While assets from Colombia, Mexico and Russia are historically among the most sensitive to swings in crude oil prices, the Colombian peso is down 11%, while the Mexican peso and Russian ruble have gained just 0.2% and 0.1%, respectively, this year, according to data compiled by Bloomberg. Brent prices have climbed 46% year-to-date, despite the OPEC+ spat.

Correlation Finder:

Pierre-Yves Bareau, the London-based head of emerging-market debt at JPMorgan Asset Management, highlighted the lag. The demand recovery will support commodities — currently trading near a six-year high — providing a positive backdrop for many assets in Latin America and the Gulf, he said.

But with the delta variant of Covid-19 spreading, others are less sanguine.

“The market thinks of emerging markets as the next vaccine trade — I don’t agree with that,” said Bhanu Baweja, the London-based chief strategist at UBS Group AG, who is bearish on commodities.

A scenario where oil drops further could boost a net importer like Turkey, where the impact of commodity prices on inflation is particularly acute. The lira has slid 14% this year, the most in the world, as the country’s central bank juggles soaring prices and rate-cut demands from President Recep Tayyip Erdogan.

Should the outlook for oil darken, it could still favor Russia and Qatar over other exporters, given their valuations and sovereign fiscal resilience, said Hasnain Malik, Dubai-based head of research at Tellimer.

But for the next few months, sentiment on oil-sensitive emerging markets could be shored up by supportive factors for crude.

READ MORE: Oil Price Shocks: FX Winners and Losers

Jeff Currie, Goldman’s global head of commodities, said it’s “extremely unlikely” oil will unravel on the scale of last year’s collapse. A surge in demand during the northern hemisphere’s summer travel season and delays reaching an Iranian nuclear accord will keep crude around $80 per barrel in the third quarter, he said.

“The market environment we see today is probably one of the best in decades,” he said on Bloomberg TV.

Rate Decisions

Bank of Korea will keep monetary policy on hold Thursday, according to all of the economists surveyed by Bloomberg. The monetary authority is only expected to start raising its benchmark rate in the fourth quarter, according to a separate surveyUncertainty over South Korea’s economic recovery is increasing following a spike in Covid-19 cases, prompting the government to raise social-distancing regulations in SeoulThe won has fallen more than 5% this yearTurkey will probably leave its benchmark rate unchanged on Wednesday, economists predictWhile President Erdogan signaled a possible rate cut in July or August, a higher-than-expected increase in consumer prices in June has reduced such a likelihood. The lira is the biggest loser in emerging markets this year

Policy makers in Chile are likely to begin a tightening cycle at their meeting on Wednesday, joining Brazil and Mexico, which have already hiked rates to contain inflation

A survey released Friday showed local traders expect a 25-basis-point increase in the key policy rate to 0.75%

China’s Cooling Growth

China will announce second-quarter economic growth data on Thursday, with the numbers being keenly watched after the authorities took a dovish tilt last week. The People’s Bank of China on Friday announced an 0.5 percentage-point cut in the reserve requirement ratio for banks effective July 15“China’s recovery is entering a more advanced, stable stage — but one that will require deft policy management to navigate emerging risks,” according to Bloomberg Economics. “The rapid rebound early in 2021 from the Covid shock is set to give way to a slowdown over the rest of the year, restrained by production bottlenecks, softening exports and sluggish consumption”Economists surveyed by Bloomberg predict gross domestic product expanded 8% from a year earlier, compared with a record 18.3% in the previous three monthsChina will release trade figures on Tuesday, while retail sales and industrial production data will be released with the GDP report on Thursday

What Else to Watch

India will release inflation and industrial production figures on Monday, and trade data on Thursday. Indonesia will also publish trade numbers on Thursday

India’s rupee has dropped 2% this year, while Indonesia’s rupiah has weakened more than 3%Economists expect Mexico’s industrial production to have increased at a slower pace in May compared with the previous readingOn Thursday, Peru reports a gauge of economic activity that will show the impact of rising political uncertainty, with the winner of the June 6 presidential election still not formally announcedIn Argentina, Bloomberg Economics expects an inflation report due Thursday to show a 50% reading for the first time since the pandemic beganNationwide protests, roadblocks and Covid-19 mobility restrictions in Colombia in May likely hindered industrial production and retail sales; figures for both are due ThursdayBrazil’s economic activity increased in May, data scheduled for Wednesday may show, continuing a recovery from mobility restrictions imposed two months earlier to curb the spread of coronavirus.

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