Between 2009 and 2016 global growth was subject to headwinds caused by bank deleveraging, fiscal tightening, a sovereign credit crisis in Europe and a collapse in commodity prices. The final removal of these headwinds has resulted in us seeing a year of stronger global growth, and we logically expect that to continue. We address the pressing topics that we believe will likely shape 2018 and the emerging market investment landscape.
Nationalist/populist leaders rule in the world’s most densely populated countries – can they avoid conflict? – Polina Kurdyavko, partner, co-head of Emerging Markets, senior portfolio manager
Nationalist leaders are in power in the US, China, India, Russia, Turkey, North Korea, Iran and Saudi Arabia. Their interest in maintaining the global conflict resolution architecture, which has been in place since 1945, seems to be waning. Can this all be ignored for another year? North Korea seems to us the first place where it could all go wrong, and arguably where the ramifications for global risk sentiment (and hence impact on US Treasuries) could be most pronounced. Equally, a potential change away from the ‘old guard’ in Russia, South Africa or Venezuela could translate into meaningful upside for investors.
Will global inflation remain low? – Nick Shearn, senior portfolio manager
The key macroeconomic surprise of 2017 was the combination of stronger growth and lower inflation. We believe that global labour markets and global product supply chains mean, on a secular basis, that inflation is becoming more of a global rather than an idiosyncratic national phenomenon. Having said that, we do not believe that the Phillips Curve is entirely redundant. Headline CPI is beginning to rise in Eastern Europe and Asia. Wages are showing sustained, if gradual, pick up in the US. Any sense that central banks need to react quickly to rising inflation pressures could derail the appetite for all risk and potentially challenge the thesis for long interest rate duration positioning in some of our core conviction markets.
What will be the effect of China’s growth transition? – Alan Siow, portfolio manager & Zhenbo Hou, junior strategist, EM
Post the party congress, there is some evidence that China is moving from an ‘offensive’ growth strategy, with excess focus on a certain GDP target, to a more ‘defensive’ one based on deleveraging, poverty reduction and environmental protection. This is sensible for China, and we would not overemphasise the slowdown, but it does raise questions for other China-sensitive regions (North Asia, Western Europe). Furthermore, against the backdrop of deleveraging, we are beginning to see some signs of cracks in the high yield segment of the Chinese corporate market, so a key watch-point for 2018 will be the extent to which we may see this weakness manifest itself in higher default rates in the region.
Will the Saudi/Iran proxy war intensify? – Tim Ash, EM senior sovereign strategist
The conflicts in Yemen, Kurdistan and Syria, and the political spats involving Qatar and Lebanon are all best understood as part of a larger struggle for power between the leading Sunni and Shia regional powers. The support of the US, Egypt and Israel for the Saudis is matched against Russian and Turkish support for Iran, which makes the conflict especially dangerous. At an asset class level, given the MENA concentration in corporate indices (investment grade in particular), this is where we would expect to see the most direct impact. Though if we were to see any meaningful escalation in tensions sending oil prices higher, it could make this more a global concern.
Will Putin win an easy re-election? – Brent David, senior portfolio manager, EM Currency
The Russian presidential election is the one major political event that no one is focusing on, yet significant uncertainties remain; not least the question mark around whether opposition candidate Alexei Navalny will be able to generate any momentum or not. If we see protests similar to those prior to the 2012 election, there is a chance that Putin will become more defensive domestically, and therefore potentially more aggressive externally. The FIFA World Cup in the summer will also increase the spotlight on Russia. On the flipside, if we were to see more benign outcomes, one area that could look increasingly attractive is the local currency corporate market, which boasts near double-digit yields, in some places and a more positive liquidity profile than much of the market.
Will South Africa face up to its moment of truth? – Russel Matthews, Partner, senior portfolio manager
We believe South Africa is now at a T-junction. Zuma’s presidency has resulted in significant institutional and policy making deterioration. This can no longer continue. The country is teetering on the verge of a third junk rating for its debt and is showing no growth potential. Events of the next 12 months, beginning with the ANC Leadership Conference this December, will demonstrate whether politicians are serious about dealing with this challenge. But a turnaround is still possible. The election of Cyril Ramaphosa as ANC presidential candidate could unleash a positive confidence shock not unlike that witnessed when Dilma was deposed in 2016 in Brazil, but the situation is urgent. We view it as a fairly binary situation, but unfortunately markets are unlikely to afford South Africa the luxury of muddling through. We feel that risk on both the upside and downside is fairly balanced at this juncture, as is the likely path for the currency from here.