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Citigroup joins UBS to predict more agony for emerging markets

[LONDON] Gains in emerging markets since the start of the year failed to make UBS Group AG and Citigroup Inc. any less bearish as they saw new risks arising and weakening the chance of 2016- or 2009-style rebound.

The MSCI Emerging Markets Index, the equity benchmark, posted the biggest two-day gain in two months and the currencies gauge rose to the highest level since July. A measure of dollar debt capped a second weekly gain, and its local-currency counterpart climbed to an eight-month high.

While the rally was supported by China's move to release more cash into the financial system and by speculation that the Federal Reserve may pause interest-rate increases this year, UBS said the key risks for emerging economies lay elsewhere. Potential declines in trade as well as economic growth could outweigh Fed and dollar moves, it said.

"Leading indicators point unanimously to a coming contraction in global trade, one that may possibly begin in Q1 2019," UBS strategists including Bhanu Baweja wrote in an emailed note Monday. "If global trade goes into recession, as we expect, emerging-market currencies will see another round of depreciation."

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Citigroup strategists are "now bearish" on emerging-market sovereign credit "as a whole" because of debt-service pressure. New sovereign issuances may strain the bond markets that are already under pressure from volatility in U.S. and global stock markets, they said.

"One of the monthly peaks in debt-service payments happens in March, with US$10.9 billion in the sovereign space and US$7.7 billion on the corporate-credit front," strategists including Luis Costa wrote in their note. "That may be particularly troublesome in January, given the expected pipeline of new issuances on the sovereign front."

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