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EM Investors Start to Put Vote Jitters Behind Them

Sydney Maki
·2 mins read

(Bloomberg) -- Emerging-market investors are beginning to factor in a victory for Joe Biden in next month’s election, a likely boon for stocks and bonds.

Citigroup said the worst is over for developing-nation assets and Morgan Stanley is betting volatility will ease as there’s more clarity on the outcome of the vote. On Friday, Biden’s chances of winning the Electoral College rose to a record 85.1%, according to the latest run of poll aggregator FiveThirtyEight’s election forecasting model.

“A Biden victory should be good news for emerging markets if it means a multilateral approach, a more rules-based approach to international relations,” said Marcelo Carvalho, head of global emerging markets research at BNP Paribas in London. “That should reduce policy uncertainty.”

MSCI Inc.’s gauge of emerging-nation equities reached its highest since January on Friday, marking its best weekly performance in 18. The CBOE Emerging Markets ETF Volatility Index, which tracks the expected volatility in MSCI’s benchmark, fell 11% on Friday, the most in a month. Dollar-denominated government bonds, meantime, posted their first weekly gain since early September, a Bloomberg Barclays index shows.

It’s a contrast to the risk aversion of the past month, when rising infections of Covid-19 and an increasingly tense election campaign pushed up volatility and weighed on sentiment. Confidence is rising now that investors feel they have more clarity on the outcome of the Nov. 3 vote, said Eric Baurmeister, head of emerging-market debt at Morgan Stanley Investment Management Inc. in New York.

“The thing markets hate the most is uncertainty,” Baurmeister said in an interview. “Risk assets have definitely responded positively to the lead of Biden and Harris increasing.”

A weaker dollar and better stimulus prospects if there is a Democratic sweep of the presidency and both houses of Congress would also boost stocks, Morgan Stanley equity strategist Jonathan Garner wrote in a note.

READ: Citi Says Worst of U.S. Election Risk in EM May Already Be Over

“U.S. election risk seems to be abating,” Citigroup Global Markets strategists including Eric Ollom, Donato Guarino and Ayoti Mittra wrote in a note. “Perhaps this is the time to call the bottom.”

(Updates with volatility ETF, updated prices in fifth paragraph)

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