Emerging markets forge own paths
Given that in 2017, the Federal Reserve repeatedly hiked interest rates, pressure to reduce oil production sent prices higher and a new US president took office threatening to start trade wars in all directions, emerging markets largely had a good year.
Growth was solid more or less throughout the emerging market world, inflation was more or less under control and there was even a reduction in vulnerabilities for some of the fragile countries with large current accounts. Emerging market equities, after the volatility of earlier years, went on a sustained rally.
Their prospects for 2018 defy easy generalisation. A world in which their stocks and bonds are treated as generic risk assets does no favours to the countries concerned nor, ultimately, to investors. Following the taper tantrum of 2013 and the sudden sell-off across the asset class in early 2016, the lack of a simple animating story for the group in 2017 is a positive development.
If the worrywarts about US inflation and bond prices are right and there is a sudden rise in yields, the traditional patterns could reassert themselves quite quickly. Yet there are fewer vulnerable economies than before. Even the “fragile five” countries of India, SA, Brazil, Turkey and Indonesia, named for their dependence on external financing, have generally reduced their current account deficits.
Possible shocks include Donald Trump’s potential trade war and a slowdown in China. Yet while the US president’s rhetoric about deficits remains frothy, any actions seem likely to be narrowly targeted on particular products from particular countries, such as steel from China. Chinese debt levels remain high, but growth is solid and core inflation is contained, meaning that the People’s Bank of China has room to loosen if conditions worsen.
The fortunes of emerging markets can never be totally divorced from the lead given by the rich countries. But the fates of most of the big middle-income economies are, for the moment, in their own hands. /London, January 16.