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The
bank said it was sticking to its core view that developing
economy currencies and select countries' bonds would continue to
climb, but was dialling back its bullish bets after November's
surge.
That included closing long positions on South Africa's rand,
which has surged 13% since June, tightening stop-losses on Latin
American currencies like Brazil's real and Mexico's and
Colombia's pesos, and chopping back a bunch of bond bets
including in Egypt and Ukraine.
"We see the rally in EM (emerging market) currencies being
front-loaded into year-end and 1Q21, but then petering out,"
Morgan Stanley's analysts said. "We are also neutral on EM
credit, where we think that spreads are close to bottoming out."
They said they were watching China's credit cycle particularly
closely.
"China could be the first among the major economies to start
applying the brakes next year" in terms of stimulus, Morgan
Stanley added, "and, when it does, markets will likely pay
attention."
The currencies of commodity-producing countries are likely to
suffer as they generally rally as China's credit impulse
intensifies and depreciate as it wanes.
A more encouraging signal could be an expected increase of the
International Monetary Fund's Special Drawing Rights (SDR) that
is likely, in dollar terms, to be worth between $500 billion to
over $1 trillion.
An SDR can be thought of as a credit token issued by the IMF to
countries that can then exchange it for hard currency.
An increase would be supportive to emerging markets, in part
because it would signal greater international co-operation, and
could help debt-strained countries such as Sri Lanka, Kenya,
Argentina, Bahrain, Ecuador, Ghana and Pakistan.
On average, a $500 billion equivalent increase would help boost
foreign exchange reserves 21%-22% in Bahrain and Ecuador and
more than 10% in Pakistan, Sri Lanka and Ghana.
"It could (also) increase expectations of further financial aid
if required." Morgan Stanley said.
(Reporting by Marc Jones; Editing by Mark Potter)
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