Es­sen­tial to stay the course in emerg­ing mar­kets

Pretoria News - - BR FOCUS - MANRAJ SEKHON

EMERG­ING mar­kets are at a rare in­flec­tion point, with mul­ti­ple cross­cur­rents.

A com­bi­na­tion of the ul­tra-loose mone­tary pol­icy hang­over from the global fi­nan­cial cri­sis, a low global growth en­vi­ron­ment from weak man­u­fac­tur­ing and in­dus­trial ac­tiv­ity, the con­tin­ued rise of the con­sumer, and the dis­rup­tion and op­por­tu­ni­ties of the new econ­omy have pro­vided a heady mix.

While mar­ket sen­ti­ment in 2019 was weighed down by eas­ing growth con­cerns, emerg­ing mar­ket growth is fore­cast by the In­ter­na­tional Mone­tary Fund to ac­cel­er­ate in 2020, and re­main more than dou­ble that of de­vel­oped mar­kets.

Im­prov­ing fis­cal, eco­nomic and mone­tary poli­cies and a re­newed fo­cus on struc­tural re­forms in many emerg­ing mar­kets has been gain­ing trac­tion.

Sup­ported by more con­ducive mone­tary poli­cies in de­vel­oped economies and eas­ing in­fla­tion­ary pres­sures, cen­tral banks in emerg­ing mar­kets gen­er­ally turned more dovish in 2019. We ex­pect this trend to con­tinue in 2020, as pol­i­cy­mak­ers have greater flex­i­bil­ity in stim­u­lat­ing eco­nomic ac­tiv­ity.

Al­though US-China trade ten­sions have de-es­ca­lated in the short term, on ris­ing ex­pec­ta­tions of a par­tial trade deal and plans for both coun­tries to scale back tar­iffs, we ex­pect the broader eco­nomic con­flict to re­main for some time. The im­pact from the trade con­flict has not been lim­ited to China. While US im­ports from China over the past year de­clined $35 bil­lion (R505.68bn) to $497bn, China’s im­ports from the US de­creased by more – $40bn to $125bn.

There­fore, we be­lieve a com­pre­hen­sive agree­ment re­mains in the best interests of both sides.

The Trump ad­min­is­tra­tion will be acutely aware of this head­ing into an elec­tion year.

China’s ini­tia­tives to strengthen and di­ver­sify its econ­omy have been largely over­shad­owed by trade and slowing growth fears.

The gov­ern­ment’s fo­cus on eco­nomic re­struc­tur­ing and long-term sus­tain­able growth has led to an ac­cel­er­a­tion in the im­ple­men­ta­tion of struc­tural re­forms and wide­spread in­dus­try con­sol­i­da­tion, as well as the devel­op­ment of lo­cal sup­ply chains in the tech­nol­ogy space to re­place US sources.

China will be a fron­trun­ner in the 5G arena and is ex­pected to have some 600 mil­lion 5G sub­scribers by 2025, or about 40 per­cent of the fore­cast 1.6 bil­lion sub­scribers glob­ally. To­gether with ar­ti­fi­cial in­tel­li­gence (AI) and ro­bot­ics, this will help drive growth in China’s new econ­omy as it strives to be­come less re­liant on the US.

In our view, China will emerge stronger and more self-re­liant with mul­ti­ple pil­lars of eco­nomic sup­port through this cri­sis.

Tai­wan is see­ing some spillover ben­e­fits from the trade war as its com­pa­nies start on­shoring some op­er­a­tions.

Gov­ern­ment in­cen­tives to at­tract op­er­a­tions back to Tai­wan mean that this will have rip­ple ef­fects on the do­mes­tic econ­omy.

As one of the largest and fastest-grow­ing mar­kets for dig­i­tal con­sumers, In­dia is a mar­ket where dis­rup­tive tech­nol­ogy is driv­ing pro­duc­tiv­ity and de­fla­tion more than gen­er­ally ex­pected, with value ac­cru­ing to end-users.

Key re­forms – in­clud­ing the re­cent re­duc­tion in cor­po­rate tax rates, mea­sures to im­prove the reg­u­la­tory en­vi­ron­ment and mone­tary eas­ing – will likely steady the econ­omy.

In Brazil, op­ti­mism sur­round­ing the gov­ern­ment’s eco­nomic agenda has re­sulted in a more favourable in­vest­ment cli­mate.

While the coun­try’s eco­nomic re­cov­ery has been slower than ex­pected, we be­lieve the gov­ern­ment and cen­tral bank’s ef­forts are im­prov­ing the coun­try’s longer-term growth po­ten­tial.

In­fla­tion has re­mained un­der con­trol, al­low­ing the cen­tral bank to ease rates to record lows to stim­u­late the econ­omy.

So­cial security re­form is key to stim­u­lat­ing in­vest­ment and credit, which will help im­prove eco­nomic ac­tiv­ity and can sig­nif­i­cantly re­duce Brazil’s fis­cal deficit.

A major pri­vati­sa­tion plan has also been an­nounced, and tax and other struc­tural re­forms should im­prove the ease of do­ing business.

The emerg­ing mar­ket land­scape con­tin­ues to trans­form as pol­i­cy­mak­ers fo­cus on build­ing re­silience dur­ing times of stress.

Emerg­ing mar­ket economies are more di­ver­si­fied now – with do­mes­tic con­sump­tion and tech­nol­ogy of­fer­ing new driv­ers of growth – and they are grow­ing less re­liant on low-cost man­u­fac­tur­ing and com­modi­ties.

Since the turn of the cen­tury, we have wit­nessed a sig­nif­i­cant in­crease in the trade value of hi-tech goods be­ing ex­ported by emerg­ing mar­ket coun­tries.

We have also seen how com­pa­nies are us­ing in­no­va­tion and tech­nol­ogy to leapfrog and dis­rupt tra­di­tional business mod­els. Ar­eas such as e-com­merce, dig­i­tal bank­ing and mo­bile com­put­ing will be fun­da­men­tal driv­ers of emerg­ing mar­kets for years to come.

Equally, fields such as AI, au­ton­o­mous driv­ing, ro­bot­ics and the “internet of things” con­tinue to at­tract in­vest­ment, sig­nalling strong longert­erm prospects.

Much noise and con­flict­ing sig­nals dom­i­nated 2019, which led many in­vestors to limit their risk ap­petite and dis­count the long-term growth driv­ers in emerg­ing mar­kets.

While some of th­ese un­cer­tain­ties may per­sist in the near term, we be­lieve it is es­sen­tial to stay the course. The mar­kets are just be­gin­ning to re­alise op­por­tu­ni­ties from tech­nol­ogy dis­rup­tion and the tran­si­tion of busi­nesses away from tra­di­tional mod­els.

We be­lieve the in­vest­ment scope in the emerg­ing world is wide and promis­ing for in­vestors who can over­look near-term volatil­ity and in­vest for the longer term.

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