Rose-t nted glasses
Piotr Matys, strateg st, Rabobank
The lacklustre performance of the majority of CEEMEAs is in line with our scepticism that the U.S. and China will be able to narrow their differences.
The markets seem to be looking at trade through rose-tinted glasses expecting it to end or at least not to escalate further. On numerous previous occasions, we have contested this notion arguing that the main objective for the U.S. is not only to reduce its substantial trade deficit with China but to preserve its status of a global superpower, which is challenged by such policies as “Made in China 2025.” We are also not convinced that the Fed putting on hold its tightening cycle will prove sufficient to stimulate demand for risky assets in a sustainable way. This may sound counterintuitive, but the dovish tone from the Fed does not bode well for emerging markets as it reflects growing concerns among policymakers about downside risks to the U.S. economy. When the Fed raised interest rates at the end of 2015 for the first time since the global financial crisis, we interpreted it as a bullish signal for emerging markets. Given that historically, emerging markets tend to perform well when the U.S. economy expands at a decent pace, we were able to maintain a relatively positive view on risky assets even when the Fed was in a full-tightening mode. It wasn’t until the Trump administration imposed tariffs on China’s exports when we had to change our view. Throughout 2017 and until early 2018 emerging markets were also supported by a synchronized global growth. Various warning signals over the past few months left this notion in tatters. We seem to be in a synchronized slowdown caused by the trade war. This in turn poses a downside risk to emerging markets. “We are shifting from a risk of faster normalization, which was the risk at the beginning of last year, to a different risk, which is the risk of global deceleration,” Brazil’s Central Bank President Goldfajn warned recently and we fully subscribe to that.
(January 18)