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Vaccine hopes set off rush for emerging markets

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The coronavirus crisis sparked a record flight out of emerging market assets, with more than $90bn leaving bonds and stocks in March alone, according to the Institute of International Finance. But now the asset class is making a comeback.

This month’s breakthroughs in the hunt for an effective Covid-19 vaccine have fed optimism over the global economy, rekindling interest in some riskier investments. Emerging market currencies and stocks have been big winners, rallying hard for the past two weeks, while bonds have also made up lost ground. The broad-based rally took MSCI’s benchmark EM stock index into positive territory for the year, up more than 50 per cent since its March low.

And as Wall Street sets out its big ideas for 2021, EM is top of the list.

One in two fund managers in this month’s Bank of America survey picked emerging markets as their favourite for 2021. The sector will move “from resilience to outperformance” next year, Goldman Sachs analysts predicted. Renaissance Capital — an emerging and frontier market specialist often wary of making bullish calls — advised investors “to buy anything and everything” in the sector.

Nick Robinson, investment director for emerging market equities at Aberdeen Standard Investments, said a recovery in economic activity may not even be needed to keep the EM equities rally running.

“Economic growth is always helpful but sometimes you just need valuations to have diverged too much,” he said. “You also need a catalyst, which so far has been the news about vaccines and investors starting to price in a return to normality.”

Investment flows tell the same story. EM equity funds, which suffered almost uninterrupted outflows from March to September, have attracted almost $14bn in the past two weeks, according to data provider EPFR. This is mirrored by IIF data on cross-border flows, showing more than $22bn moving into local stock markets so far in November. Investors have also returned to EM debt, especially sovereign bonds issued overseas in dollars or other “hard” currencies.

Line chart of MSCI Emerging Markets indices, rebased showing Emerging markets are back in the black

Goldman Sachs’ bullish view is based on its forecast of a strong global economic recovery over the next 12 months, helping EM in particular given the “snapback potential” presented by low valuations. It picks out Mexico, which the bank thinks will benefit from a strengthening US economy, as well as having room for further policy easing next year to support growth, and Brazil, which it thinks could be lifted by rising commodity prices.

A big divergence within EM equities made a broad-based call difficult, said Mr Robinson at Aberdeen Standard. Nevertheless, he expected the sector to benefit from a rotation out of highly priced growth stocks that dominated the US Nasdaq index, into so-called value stocks: unloved shares often found in economically sensitive sectors such as energy and financial services.

Line chart of cumulative flows to mutual and exchange traded funds ($bn) showing investors stage a return to emerging market assets

“Part of the growth stock rally was driven by the idea that the future is arriving sooner, with everybody moving online and working from home,” said Mr Robinson. “Now there’s a vaccine, the future has been pushed back out a little.”

Renaissance Capital’s Charles Robertson points out that, as a lot of money now comes into EM assets through exchange traded funds, lower quality assets are likely to bounce the most, including lower-rated sovereign bonds, undervalued commodity currencies and relatively unloved or illiquid equity markets. He suggests buying a basket of African foreign currency bonds, such as those of Egypt, Kenya, Ghana, Nigeria and Angola.

Like others, however, he says a weaker US dollar is fundamental to the EM investment case. Some analysts expect the dollar to fall by as much as 20 per cent next year against the currencies of its main trading partners. That would provide a huge underpinning for emerging market assets. A weakening dollar offers foreign investors the prospects of currency gains on top of often generous equity dividends and higher interest rates on local currency bonds than those available in their home markets.

Column chart of weekly foreign investor flows to local emerging markets ($bn) showing cross-border flows have surged in two of the past three weeks

A weaker dollar also makes it easier for debtors in the developing world to repay their dollar borrowings, easing concerns about debt sustainability, and boosts earnings for commodity exporters as contracts priced in dollars become more valuable in local currencies.

However, if the dollar fails to weaken as expected, the investment case risks falling apart. “I think the dollar will be a fundamental driver,” Mr Robertson said. “But yes, it’s a big risk.”

That is not the only concern. Some EM-watchers are anxious about the rising overall debt burdens of countries that have spent their way out of the coronavirus crisis. Others are nervous about a repeat of 2013’s “taper tantrum”, when the US Federal Reserve announced a coming reduction in its bond-buying programme, and sent EM assets into freefall.

“I am worried about what happens when the market starts to think about tightening of policy again and all the stimulus that could be withdrawn,” said Aberdeen Standard’s Mr Robinson. “With a reduction in QE and an eventual raising of interest rates, you can imagine something like 2013.”



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PayPal to acquire ‘buy now, pay later’ provider Paidy for $2.7bn

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Mergers & Acquisitions updates

PayPal, the US online payments company, has agreed to acquire Paidy, a Tokyo-based “buy now, pay later” group, for ¥300bn ($2.7bn) in the latest shake-up in the industry.

The deal announced late on Tuesday, which will be paid for principally in cash, deepens PayPal’s push into the crowded BNPL sector, in which consumers spread the cost of goods over a small number of payments, typically without interest and often without requiring a credit check.

Last month, Square, the payments company led by Twitter chief executive Jack Dorsey, acquired BNPL group Afterpay for $29bn, in the largest takeover in Australian history.

Shares in San Francisco-based Affirm, another BNPL company, soared last month after it announced a partnership with Amazon allowing shoppers who spend more than $50 to make payments in monthly instalments.

Paidy, founded in 2008, is one of Japan’s few “unicorns”, or start-ups worth more than $1bn. The company launched the country’s first zero-interest post-payment service last year.

While the global BNPL market has exploded in popularity owing to the pandemic-driven boom in online shopping, the trend is only starting to catch on in Japan, where consumers still depend heavily on cash payments.

Paidy allows its 6m registered users to split the cost of goods into three equal instalments with no interest. Users can pay off their balance using cash at convenience stores or bank transfers.

According to Yano Research Institute, the volume of transactions made through post-payment services in Japan is expected to more than double from an estimated ¥882bn in fiscal 2020 to ¥1.88tn by fiscal 2024.

Paidy was valued at $1.3bn when it raised $120m in March, and was expected to list its shares in Tokyo later this year. It has been backed by trading house Itochu, Goldman Sachs and Soros Capital Management along with PayPal.

Russell Cummer, the Japanese fintech’s founder, recently told the Financial Times that a public listing “made sense” — though no firm timetable had been established. Instead, the company is now expected to become part of PayPal by the fourth quarter of this year.

“Paidy pioneered ‘buy now, pay later’ solutions tailored to the Japanese market and quickly grew to become the leading service, developing a sizeable two-sided platform of consumers and merchants,” said Peter Kenevan, PayPal’s vice-president and head of business in Japan.

“Combining Paidy’s brand, capabilities and talented team with PayPal’s expertise, resources and global scale will create a strong foundation to accelerate our momentum in this strategically important market.”

PayPal said Paidy would “continue to operating its existing business, maintain its brand and support a wide variety of consumer wallets and marketplaces”. Cummer and Riku Sugie, Paidy’s president and chief executive, will continue to lead the company, according to a statement.

“Paidy is just at the beginning of our journey and joining PayPal will accelerate our plans to expand beyond ecommerce and build unique services as the new shopping standard,” said Sugie. “PayPal was a founding partner for Paidy Link and we look forward to working together to create even more value.”

The acquisition comes as PayPal rolls out its broader strategy to become a “super app” — incorporating payments, cryptocurrency investments and savings — drawing inspiration from under-one-roof Chinese apps such as WeChat.

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Bitcoin: El Salvador’s experiment does not warrant cross-cryptocurrency price rise

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Bitcoin updates

Early adopters of virtual currencies have a clear incentive to promote mainstream acceptance. The more buyers, the higher the price. Crypto fans, therefore, hatched an online plan to bolster bitcoin as El Salvador legalised the tokens for payments. That was logical. The knock-on rise in other cryptocurrency prices was not.

Bitcoin’s 8 per cent rise over the past seven days means that it is now worth about $51,000. But according to data from CoinGecko, which tracks more than 9,000 coins, it is not the largest mover. Ethereum, the world’s second-largest cryptocurrency, has leapt 16 per cent over the past week. Solana’s SOL tokens have risen 69 per cent.

There is no sensible reason for these rallies. El Salvador is not expected to make other virtual currencies legal tender. Instead, the jumps reflect a soupy mixture of low rates, blind faith and better investor access.

Trading apps make it easier for retail investors to buy cryptos. The initial public offering of Coinbase in April raised its profile, leading to a jump in downloads.

The make-believe world of nonfungible tokens, or NFTs, has also given cryptos a boost. These prove ownership of digital assets such as art, music or even virtual pet rocks. Many use the ethereum network. Solana, which is backed by Andreessen Horowitz, has its own NFT marketplace, Solanart.

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None of this, however, has anything to do with El Salvador’s attention-seeking adoption of bitcoin. This diverts domestic attention from the failing economy of this impoverished Central American nation, the first country to embrace bitcoin as legal tender. It also supplies cheerier news flow to bitcoin fans than did the cryptocurrency’s collapse in value this spring.

Rising prices mean the total market value of cryptocurrencies has reached nearly $2.4tn. It is rapidly closing in on the previous record of $2.57tn set in May. Bitcoin’s share of the market has fallen. It is now about 40 per cent, down from 57 per cent a year ago. Yet bitcoin remains a powerful bellwether.

This could be a problem if bitcoin’s latest rally depends on success in El Salvador. President Nayib Bukele says the country has purchased 400 bitcoins — equal to just 0.002 per cent of the outstanding value. Local opposition is widespread, suggesting take-up will be low. A damp squib is more likely than the financial dislocation some critics are prophesying.

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Europe stocks notch best day in 6 weeks on sustained stimulus hopes

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Equities updates

European equities had their biggest rise since late July on Monday as weaker-than-expected US jobs data suggested pandemic-era stimulus, which has helped prop up markets, may continue for longer than anticipated.

The Stoxx Europe 600 index gained 0.7 per cent, the region-wide benchmark’s best day in six weeks, as traders analysed the implications of a large miss in US job creation. Employers in the US added 235,000 jobs in August, which fell wide of economists’ projections of more than 728,000 new hires.

“The weak jobs number gave the Federal Reserve ample room to take it easy in terms of how and when it will taper” its $120bn of monthly bond purchases that begun in March 2020, said Maarten Geerdink, head of European equities at NN Investment Partners.

Before Friday’s non-farm payrolls report, some analysts had expected the Fed to announce a reduction of its asset purchases as early as this month.

European stocks, Geerdink added, were “in a sweet spot with the eurozone economy doing well while financial conditions remain extremely loose”.

London’s FTSE 100 index also ended the session 0.7 per cent higher while US markets were closed for Labor Day.

Column chart of Stoxx Europe 600 index, daily % change  showing European stocks notch best day in six weeks

Economists expect the European Central Bank to provide an update about its own debt purchases at its meeting on Thursday, with government bond prices signalling some expectations of a pullback. The yield on the benchmark German 10-year Bund, which moves inversely to its price, was steady on Monday at minus 0.37 per cent, around its highest point since mid-July.

Technology shares, which tend to perform well when expectations of low-for-longer bond yields flatter valuations of growth companies, were the best performers in Europe with the sector rising 1.7 per cent on Monday.

In Asian equity markets on Monday, Chinese shares rallied after vice-premier Liu He said the government would continue to support private businesses despite a regulatory crackdown across the technology and education sectors. 

“Policies for supporting the private economy have not changed . . . and will not change in the future,” Liu said in comments reported by state news agency Xinhua. The CSI 300 index of mainland Chinese stocks climbed 1.9 per cent. 

Japan’s Nikkei 225 gained 1.8 per cent as investors bet that last week’s abrupt resignation by prime minister Yoshihide Suga would usher in a successor more focused on protecting the nation’s economy from rising Covid-19 cases. 

Brent crude, the international oil benchmark, slid 0.7 per cent to $72.10 a barrel.



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