As the global economic outlook worsens, how will this impact emerging markets?
At the start of the year, the market was generally optimistic on global growth and we saw great performance across markets during January. However, since then, the mood has somewhat deflated. We are starting to see outflows in emerging market equities, which have been in steady decline year-to-date (particularly in Brazil and Turkey, which have both fallen by around 20%). Credit markets held on to positive performance for a while longer into the year, but in the past few weeks have caught up. So what’s driving this turnaround in global growth, and how specifically will this impact emerging markets looking forward?
The single more important factor impacting markets right now is US rate hikes. We are also seeing a loss of global synchronisation, where the US seems to be the only growing economy. This is due to a combination of tax cuts, tax repatriation, and both the ECB and BoE lagging behind the US rate hikes. A strong US Dollar is having a detrimental impact on emerging markets as funding costs increase, and the ramifications have been particularly stark for equity markets.
Added to this is the increasing rhetoric around trade wars. Trump’s threats to increase tariffs on China are dominating headlines and should there be genuine follow through, this doesn’t bode well for international trade. The only offshoot is that it might result in a brief spike in US inflation, giving the Fed something to think about, but that should only be short lived. Overall, the fundamental data hasn’t really changed – instead, the prospects for emerging markets in world that is becoming more protectionist are being reassessed.
If the rhetoric around trade wars turns out to be just gamesmanship, emerging market equities may offer great value and opportunities. But one has to remain tactical, especially with some major elections still to play out. We see a similar story in the FX space. We haven’t yet seen outflows, that’s potentially the next step. While we still see value in emerging markets fx, we also see the need to be selective and proceed with caution.
Bart Turtelboom, Chief Executive of APQ Global