Emerging-market stocks posted their biggest gain in more than two months and an index of developing world currencies erased this year’s losses as concern faded about a surprise victory for incumbent President Donald Trump.
While the US presidential race is still too close to call, assets rebounded from a sell-off that accelerated when Mr Trump claimed victory and said he would petition the Supreme Court to intervene.
While a Democratic sweep of the presidency, Senate and House is not likely, challenger Joe Biden picked up key battleground states on Wednesday, prompting a risk-on mood for emerging-market investors.
The Mexican peso, a key emerging-market barometer because of high liquidity and a 24-hour trading day, overnight lost as much as 5 per cent before bouncing back.
Brazil’s real and South Africa’s rand led gains in developing world currencies.
“Legal challenges to the vote count could keep volatility in emerging market assets high in the very near term,” said Alejo Czerwonko, the chief investment officer for emerging markets Americas at UBS Global Wealth Management in New York.
“That said, we’ll eventually get past that and the likelihood of higher US fiscal spending, a faster economic recovery and higher inflation expectations should all support emerging markets into 2021.”
MSCI’s currency gauge rose 0.5 per cent after losing as much as 0.8 per cent earlier. The Indian rupee and Turkish lira were the biggest decliners.
MSCI’s index of emerging-market equities was up 1.5 per cent. The risk premium on developing-nation sovereign bonds narrowed three basis points.
“Risk sentiment should broadly remain supported as long as it is just a delay in getting the election outcome,” said Dirk Willer, a strategist at Citigroup Global Markets in New York.
“But there is a risk to broad sentiment if the process drags beyond this week with potential for legal challenges.”
Stocks rallied this week amid speculation a Biden victory would allow politicians to pass a US stimulus plan and reduce geopolitical uncertainty.
Senate Majority Leader Mitch McConnell, who won his re-election bid, said a stimulus bill was needed before the end of the year.
“Markets are moving from pricing a blue sweep as the most likely scenario to pricing political paralysis amid risks of a contested election,” said Witold Bahrke, a strategist at Nordea Investment Management in Copenhagen.
“It’s difficult to talk about any winner across emerging markets if Biden doesn’t win the White House race or if we get a contested election.”
South Africa’s rand reversed a drop of as much as 2.2 per cent, breaching 16 to the dollar for the first time since March, with favourable local economic data supporting the currency.
Emerging markets are an attractive investment opportunity in the event of a Biden presidency and a Republican-controlled Senate, the world’s largest money manager said.
Rick Rieder, chief investment officer of global fixed income at BlackRock in New York, said developing-nation assets looked more appealing in this low-rate world and could also benefit from a more moderate leader in the White House.
“We’ll have a dynamic with a decent economy, presumably if you don’t have a second wave of Covid, so I actually find some of the risk assets – some of the yielding assets – much more attractive than Treasuries,” Mr Rieder told Bloomberg TV.
“Buying the 10-year note at 75 basis points won’t take your return to the promised land.”
Shamaila Khan, director of emerging-market debt at AllianceBernstein in New York, says she is still positive on emerging-market bonds.
“There will still be stimulus even without a blue wave, just the timing and scope will be different,” Ms Khan said.
“A Biden presidency could lead to lower headline risk on China. The most important risk that we are looking at is the vaccine, however, to further drive EM performance.”
Jens Nystedt, a senior portfolio manager at EMSO Asset Management in New York, said: “We’re seeing a positive reaction in EM to some more clarity with regards to the US election outcome in the near future.
"Lower likelihood of sizeable fiscal stimulus caps US interest rates. Hence, we’re seeing increased demand for EM duration.”
A Biden win would not guarantee the stimulus bill emerging-market investors are banking on, said Christopher Shiells, an analyst at Informa Global Markets in London.
“The positive EM picture was for the blue wave and thus a new wave of stimulus, but even if Biden is declared the winner, the Senate looks like it will remain Republican so there will be no easy path to stimulus,” Mr Shiells said.
“Still, I believe that EM investors will stay looking beyond this and towards year-end look ahead to the 2021 economic recovery.
"If there is progress on a Covid vaccine then it will be a positive EM picture and thus some may take the US election volatility as an opportunity to buy.”
If Mr Biden does not win, implications for emerging markets would be limited said Tuan Huynh, chief investment officer for Europe and Asia-Pacific at Deutsche Bank International Private Bank in Frankfurt.
A win to Mr Trump would maintain the status quo, with further tensions between the US and China, Mr Huynh said.
Mr Biden may not change the US stance towards China but the tone would be “more civilised".
