Market Chronicle – Caution and optimism in emerging markets (Policy Brief)
The IMF has released its latest projections for economic activity in emerging markets. Chinese growth is expected to slow from 6.7% in 2016 to 6.5% in 2017 and 6.0% in 2018. Russia, Brazil, and Nigeria are expected to emerge from recession with growth of 1.1%, 0.2%, and 0.8% respectively in 2017. India is expected to make a positive contribution to the global economy with growth of 7.2% this year, compared with 6.6% in 2016. Growth in emerging countries is expected to increase by 0.4 points this year to 4.5%, while global growth is expected to reach 3.4%, compared with 3.1% in 2016.
On the financial markets, three risks are currently considered to affect emerging countries: (1) the introduction of border taxes by the next US administration, which would create a price competitiveness deficit for certain countries exporting to the United States in the short term, (2) the continued appreciation of the US dollar, which would weigh on the debt of non-financial companies whose activity remains supported by foreign currency leverage, and (3) an increase in targeted taxation on China, which would weigh on the whole of Southeast Asia.
Countries with a net trade advantage over the United States should therefore be avoided, as they would be the first to be targeted by any protectionist measures. Technology sectors are also affected by this issue (China, South Korea). The challenge is therefore to identify countries that are net exporters of raw materials, less dependent on a potential slowdown in China, and not targeted by potential surcharges imposed by the next US administration. This is the case for Russia, Brazil, South Africa, Colombia, Nigeria, and the United Arab Emirates, among others.
Medium-term attractiveness (during the year) remains high due to the risk of disappointment with the next US figures – market optimism since November 8, 2016, could exaggerate expectations of an acceleration in US activity. However, the rise in leading indicators in industry currently reflects overheating in emerging economies, which calls for caution and, above all, selectivity.
Emerging markets – particularly equity markets – could benefit from positive investment flows in response to disappointment in developed markets. A stabilization of yields in the sovereign bond segment would limit the likelihood of further rises in equity indices, whose valuations are reaching historic highs. Continued issuance and the narrowing of spreads in the credit market would limit the potential for a rebound in the high-yield bond market, particularly in the United States. If expectations of continued growth in developed economies and lower tax pressure remain unchanged, emerging markets would not be favored. Any adverse scenario would favor them.
