Emerging Markets Outlook: Be cautiously optimistic for moderate growth

Cautious optimism for moderate growth seems to be the sentiment expressed by one strategist when it comes to emerging markets, given risks posed by Indian elections, Turkey’s politics and the US-China trade tussle. 

In a note to clients, Per Hammarlund, Chief Emerging Markets Strategist at Nordic bank SEB, said while neither recessions nor economic recoveries die of old age, global and emerging market growth rates appear to be stabilising. 

“The combination of low inflation and stable monetary policy should bolster investor confidence that emerging markets generally are facing few risks of overheating and subsequent volatility. In an environment of accelerating growth in China and other BRIC economies, decent growth in the US, but disappointing growth in the EU, we look favourably primarily on the CNY, RUB, IDR and BRL,” Hammarlund wrote in a recent note to clients. 

However, in contrast to the situation in 2016 when most emerging market economies were pulled along by a massive stimulus in China, SEB economists expect markets in countries such as Turkey, South Africa, and potentially Mexico to perform relatively poorly. 

“These countries may also experience idiosyncratic risks from adverse political and geopolitical events,” Hammarlund added. For instance, the Nordic bank’s commentators expect the Turkish lira to weaken throughout 2019. 

“We expect the TRY to be more volatile in Q2 2019 and Q3 2019 than it was in Q1 2019. While the TRY will experience periods (days and weeks) of strength, we expect it to weaken throughout the year, primarily due to high inflation and weak growth. The TRY will most likely also move sharply on political events, including developments in US-Turkey relations and statements by President Recep Tayyip Erdoğan.”

SEB expects USD/TRY to end Q2 2019 around 5.80 and Q3 2019 around 6.00, but the forecasts are subject to more uncertainty than usual. 

“While there are signs that the recession is bottoming out, the recovery will be slow since the preceding boom was a credit-fuelled one. Risks are skewed to the downside due to a sharp contraction in private consumption. Our main scenario is that Turkey will be forced to seek support from the IMF to restore confidence that its capital and financial accounts will remain open.”

Hammarlund also said stable climes beckon for China. “The country’s growth is bottoming out and investment is re-emerging as a source of strength from a position of weakness in 2018. Even though funding conditions are more accommodative, financial de-risking is not dead. We still see room for the People’s Bank of China (PBoC) to cut the reserve requirement ratio by at least 100bps in 2019, with the next one coming as early as April 2019.”

And finally, on the upcoming Indian general election and its potential aftermath, Hammarlund’s team expects incumbent Prime Minister Narendra Modi and the BJP to maintain control of parliament after election results are unveiled on 23 May. 

“The Sensex and the rupee have strengthened on hopes that a victory for Modi’s BJP will result in business friendly reforms. However, while we expect reform efforts to accelerate again we do not expect them to be substantial enough for economic growth to reach the ambitious 8 to 10% annual expansion that government is aiming for. Nevertheless, the INR will benefit, while a loosening of monetary policy will push down yields in the near term.”