In 2019, emerging markets will see big wins or big losses
Emerging markets are tentatively picking themselves up from the floor after a rout that wiped about $5 trillion off the value of stocks since a high in January 2018. But the reprieve may not last long.
Rising rates in the U.S., a stronger dollar, Beijing and Washington’s trade war, lower oil prices and the emergence of populist leaders in Latin America’s 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 who has 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 U.S. Federal Reserve after Chairman Jerome Powell wasn’t as dovish as they’d hoped in comments that followed the central bank’s interest-rate increase Dec. 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 Powell wouldn’t 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 they’ve 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 nation’s most influential military and business figures that Beijing won’t back down quickly to U.S. trade and investment demands. Any increase in tensions between the world’s two dominant economies would probably deal a blow to Asian assets. They’ve already taken a hit, with China’s main stock index suffering its worst year since 2008, and equities in South Korea and Taiwan also falling sharply.
Populists: Brazil and Mexico start 2019 with new populist presidents, albeit from opposite ends of the spectrum. Brazilian stocks rose to record highs after President-elect Jair Bolsonaro said he’d sell dozens of state-owned companies and picked University of Chicago-trained Paulo Guedes as his chief economic adviser.
In Mexico, leftist Andrés Manuel López Obrador has traders on edge after canceling a $13 billion airport. Investors will watch to see if the president can maintain a primary budget surplus even while spending more on social programs. Russian sanctions: Even after the U.S. Treasury said it’s ready to lift sanctions on one of Russia’s biggest companies, United Co. Rusal, investors will be wary of moves by Congress. If special counsel Robert Mueller’s investigation into the Kremlin’s interference in the 2016 U.S. election reaches a damning conclusion, that could trigger new penalties, including restrictions on trading Russian sovereign debt or banks.
Saudi oil woes: Brent crude’s 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 Khashoggi’s murder in Istanbul — means that MSCI’s decision to include Saudi stocks in its emergingmarket index in 2019 might not be enough to attract the investment the kingdom desperately needs.
Elections: Plenty of upcoming polls will keep traders on edge. Indians vote in a general election in April or May, and analysts at Credit Suisse Group AG say markets haven’t priced in the risk of a coalition government emerging, which could derail Prime Minister Narendra Modi’s economic reforms. Thailand is set to hold a vote Feb. 24; in Argentina, Mauricio Macri, who’s popular with foreign investors, faces an election in October; South Africa’s election in May will be a key test for President Cyril Ramaphosa; and Nigerians vote in mid-February.