Emerging markets are tentatively picking themselves up from the floor after a rout thats wiped about $5 trillion off the value of stocks since January. But the reprieve may not last long.
Rising rates in the US, a stronger dollar, Beijing and Washingtons trade war, lower oil prices and the emergence of populist leaders in Latin Americas two biggest economies could all weigh on markets.
“The theory is dead simple: emerging-market assets have already bombed, so the downside, if things get worse, is much lower and if things recover they have greater potential to perform,” said Anthony Peters, an independent analyst, formerly at Blockex Ltd, whos long covered developing nations. However, “they have the potential to go much lower for much longer than anybody had ever thought possible.”
The Fed and the dollar
Investors will be carefully watching the US Federal Reserve after Chairman Jerome Powell wasnt as dovish as theyd hoped in comments that followed the central banks interest-rate increase on December 19.
A report said President Donald Trump has repeatedly discussed firing the central bank chief, but Treasury Secretary Steven Mnuchin moved to reassure financial markets that Federal Reserve Chairman Jerome Powell wouldnt be ousted.
Added to that, the European Central Bank is set to end asset purchases that have pushed billions of euros into higher-yielding markets such as Poland and Hungary. That may force eastern European monetary authorities into rate increases theyve long resisted.
In emerging Asia, economies heavily reliant on foreign investments, such as Indonesia, will face the challenge of maintaining currency stability and stemming outflows.
Trade wars and China
Chinese President Xi Jinping remains defiant, telling some of the nations most influential military and business figures that Beijing wont back down quickly to US trade and investment demands. Any increase in tensions between the worlds two dominant economies would probably deal a blow to Asian assets. Theyve already taken a hit, with Chinas main stock index on track for its worst year since 2008 and equities in South Korea and Taiwan also falling sharply.
Brazil and Mexico will start 2019 with new populist presidents, albeit from opposite ends of the spectrum. Brazilian stocks have risen to record highs after Presidentelect Jair Bolsonaro said hed sell dozens of state-owned companies and picked University of Chicagotrained Paulo Guedes as his chief economic adviser. Still, the rightwinger faces a tough challenge reforming the countrys generous and exhausted pension system, which will be key to sustaining the market rally.
In Mexico, leftist Andres Manuel Lopez Obrador has traders on edge after canceling a $13 billion airport. Some concerns diminished after he published a conservative fiscal plan for 2019 and after bondholders accepted Mexicos offer to buy back $1.8 billion of debt used to fund the airports construction. Nonetheless, investors will watch to see if the president can maintain a primary budget surplus even while spending more on social programs.
Even after the US Treasury said its ready to lift sanctions on one of Russias biggest companies, United Co. Rusal, investors will be wary of moves by Congress. If Special Counsel Robert Muellers investigation into the Kremlins interference in the 2016 American election reaches a damning conclusion, that could trigger new penalties, including restrictions on trading Russian sovereign debt or banks.
Saudi oil woes
Brent crudes plunge since early October to below $55 a barrel is bad news for many major developing economies, not the least Saudi Arabia. It needs prices as high as $95 per barrel to balance its 2019 budget, according to Bloomberg Economics. The financial squeeze — combined with the Western backlash over columnist Jamal Khashoggis murder in Istanbul — means that MSCIs decision to include Saudi stocks in its emergingmarket index from next year might not be enough to attract the investment the kingdom desperately needs.
There are plenty of upcoming polls to keep traders on edge. Indians vote in a general election in April or May and analysts at Credit Suisse Group AG say markets havent priced in the risk of a coalition government emerging, which could derail Prime Minister Narendra Modis economic reforms.
Thailand is set to hold a vote February 24 after several delays since the ruling party took over in a bloodless military coup in 2014, and investors are worried about the prospect of social unrest. Indonesias turn is April 17 — a rematch between President Joko Widodo and his rival Prabowo Subianto.
In Argentina, Mauricio Macri, whos popular with foreign investors, faces an election in October. With the economy in a recession and inflation at almost 50 per cent, investors are concerned that voters may turn to former populist President Cristina Fernandez de Kirchner.