Michael Ganske, partner and head of Emerging Markets at Rogge Global Partners has said that slugging global growth and a challenging outlook for commodities are two key factors in his assessment of the state of emerging market investments.
In a series of written questions and answers, Ganske started by giving InvestmentEurope his view on the ongoing macro environment.
“Emerging Markets are experiencing a period that can best be described as sluggish growth. The growth differential between emerging and developed markets is now back to its long term average, after several years of outperformance by the former. Many emerging economies are still growing faster than the developed world, but the BRICs, with the exception of India, are facing significant headwinds. Russia and Brazil are in recession and China has slowed down markedly.”
“One driver of the slow-down is the slump in commodity prices. Many emerging markets are commodity exporters and the terms of trade shock is negative for their economic growth. On the other hand, commodity importers such as Central and Eastern Europe are benefiting and the price drop is deflationary, which gives many EM central banks more flexibility. The sharp sell-off in EM currencies acted as a shock absorber for many economies, but also created an inflationary impulse where the correction was very sharp. An example for this is Brazil, which finds itself being forced to remain in a hiking cycle with policy rates in double digit territory. A more positive example is Russia, where the central bank abandoned attempts to stabilize the currency and is currently in an easing cycle. This helped to dampen a sharp recession caused by the oil price collapse and sanctions.”
Given the IMF and World Bank outlook for next year being turned down somewhat, do you agree or not, and how does that affect your approach to possible investment opportunities?
“We agree with their assessment. We will likely see just a moderate pick up in global growth for 2016, after a rather disappointing 2015 performance.
That said, global growth rates just above 3% have to be accepted as the new normal in our opinion. Accommodative unorthodox monetary policies over the last years have been effective in minimizing the negative economic impact of the global financial crisis, but didn’t solve the problem of high leverage in the global economy and have made it even worse in many countries. From a sovereign perspective most emerging economies still have very low indebtedness, but in some cases, such as Malaysia or China, private leverage has increased significantly. The deleveraging cycle which occurred in many developed economies has just started in the emerging world, which is one constraint on their growth rate. That, plus the negative terms of trade shock caused by the fall in commodity and energy prices, is dampening the growth momentum in commodity exporting economies.”
How important is a rate hike by the Fed actually, given that it is surely a step back towards normality rather than an indicator of rampant inflation eating away at the value of coupons, etc?
“The Fed’s monetary policy and a potential first rate hike in the coming quarters is important for global financial markets and also for emerging markets, but in our opinion it will not trigger a broad based sell-off in emerging assets. Emerging markets risk premia have risen since the ‘taper tantrum’ in May 2013.”
“Furthermore, emerging market currencies have repriced significantly since beginning of the year. One could argue that the markets already price in a normalization of monetary policy in the US. Communication by the Federal Open Market Committee (FOMC) will be crucial to managing the first rate hike after the prolonged period of historically low interest rates. We expect a minimal first hike and a shallow hiking cycle where the FOMC is trying to anchor terminal rate expectations and we, therefore, expect a limited impact on the Treasury curve. Economically, there is little reason for the Fed to start hiking at this stage, with little sign of inflationary pressure and the growth picture in the US economy mixed. Consequently, the start of a hiking cycle will be motivated primarily by the desire to normalise monetary policy, not by the need to fight rampant inflation.”