A commonly heard refrain amongst investment circles is that emerging markets, or EMs, are no longer what they used to be over the past two decades. Coming out of the Global Financial Crisis, EM equities were the best performing regional equity market, returning 79% in 2009 compared to a 27% return by the S&P 500. But it's been pretty much downhill from there, with the EM lagging behind the Developed Markets (DM) with a 7% return vs. 13% by the DM (excluding the U.S.) in the current year. A similar narrative has been playing out in the energy markets, with EMs hardly visible in the global ESG and renewable energy boom despite being the most vulnerable to climate change.
But a cross-section of Wall Street is now saying not to give up on EMs just yet.
Investors and strategists at Goldman Sachs and JPMorgan Chase are saying there's plenty of value to be found in EM commodity markets regardless of whether or not OPEC+ can resolve its latest deadlock.
In fact, some analysts have labeled it a "generational opportunity".
"A generational opportunity exists today in many of the deepest-value emerging markets. 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," Whitney Baker, the former head of emerging-market research at Bridgewater Associates, has told Bloomberg.
OPEC+ Spat? No Worries
Oil prices have been reeling ever since OPEC+ talks collapsed on Monday due to major disagreements by its members. Major cracks appeared in the ministerial meeting with the United Arab Emirates continuing to block an agreement because it wants to increase its oil production before demand falls as per WSJ. The market fears that the UAE might "want out of OPEC so it can pump 4M bbl/day and make hay while the sun shines," Phil Flynn, market analyst at Price Futures Group, has told MarketWatch.
The UAE's objection derailed a proposal to ease existing output curbs in a controlled manner and allow production to rise by 400K bbl/day each month through December, leading to a planned OPEC+ meeting being called off with no new suggested date for the next gathering. This, in effect, leaves the organization's current production limits in place. However, there's a growing sense that the latest development is not necessarily bullish for oil markets because of the risk that the whole thing might fall apart and become a free for all, meaning a lot more oil potentially gets put on the market.
The oil markets appear spooked, with oil futures charts in deep backwardation; in fact, oil prices for U.S. crude for delivery in December 2021 are currently trading at a big premium to oil for delivery in December 2022, a bearish signal.
Early on Monday, reports emerged that a compromise had been reached, though not official, that would raise UAE's baseline, allowing it to eventually pump more. It's only a provisional compromise agreement, which still has to get through an official OPEC+ meeting, which has not been scheduled.
It's eased some of the uncertainty that there could be another oil price war.
Despite OPEC's dithering, analysts such as GS and JPM have been optimistic about oil and not afraid that the cartel's inability to strike a deal would derail the global surge in demand for commodities as economies pick up steam amid the widening vaccine rollout.
Indeed, these bulls are saying that cheap valuations and hawkish central banks will continue to support currencies closely tied to oil's moves should a slump in crude actually materialize.
Chris Turner, the head of currency strategy at ING Groep NV in London, has told Bloomberg that front-loaded tightening cycles in Russia and Mexico already make those countries' currencies winners in the current environment.
That sentiment is supported by Goldman strategists, including Zach Pandl and Kamakshya Trivedi, who have picked the Ruble, Peso, and Brazil's Real as being bullish despite the latest spate of volatility.
The evidence thus far appears to favor the bulls.
The Mexican peso and Russian ruble are little changed this year at a time when Brent is up 50% despite historically being among the most sensitive to swings in crude oil prices.
But bears like Bhanu Baweja, the London-based chief strategist at UBS Group, have countered by arguing that the rapid spread of the new delta variant of Covid-19 could slam the brakes on the EM party.
However, in the event that the oil outlook worsens over the coming weeks and months, exporters such as Russia and Qatar still hold the advantage over their peers thanks to their relatively cheap valuations and sovereign fiscal resilience.
By Alex Kimani for Oilprice.com
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