Emerging economies have faced a backlash in the last few months as a consequence of the global economic weakness and the uncertainty related to global trade. This weighed on the performance of EM equities in the third quarter, although they recovered somewhat in September. EM debt proved more resilient, supported by investors’ appetite for yield. Idiosyncratic events (Argentina, Saudi Arabia and Turkey, to name a few) also impacted the overall more fragile environment for EM. As a consequence, we have revised down our EM GDP growth forecast to 4.2% in 2019 and 4.4% in 2020, from 4.3% and 4.5%, respectively, with significant country divergences.
While global economic growth will remain lacklustre for some time yet, we see several factors supporting risk sentiment for EM assets. Global synchronised easing by central banks could continue to support EM economies and highlight the relative attractiveness of EM assets. In addition, the prospect of a weaker dollar as the Fed expands its balance sheet again could be supportive for EMs. While weighing on growth and confidence, trade wars may open up some selective opportunities at the country/sector level and may produce some winners among EM economies from a relocation of the global supply chain.
In conclusion, although we prefer to maintain an overall cautious stance for the time being, our outlook is still constructive for EM assets in the medium term – as long as a global recession is avoided. EM bonds in hard currencies could continue to be seen as a source of income in a world of scarce yield, and local currencies could come back in focus with a weaker dollar in sight. In EM equities, opportunities at country, regional and sector level will be favoured in a world of increasing fragmentation and a reshaping geopolitical equilibria. Nonetheless, investors will continue to face headwinds going forward as global uncertainties are set to remain and they will have to deal with scarce market liquidity conditions. In such an environment, skilful selection and a careful top down assessment of global and country dynamics will be essential to limit risks and deliver sustainable returns.