With a last quarter surge after a rocky start in 2019, the main emerging market stock and bond indices managed 15% gains, largely due to relief from negative economic policy and performance expectations. The US Federal Reserve reversed signaled monetary tightening; Washington and Beijing agreed to roll back retaliatory tariffs in their trade and investment showdown; energy and food price inflation resisted geopolitical and climate stress; and developing country growth was only around half a percent below the magic 5% threshold investors consider fast-track. With this worst-case avoidance including, plunge into advanced economies’ negative debt yields, a handful of currencies were up against the strong dollar, as the Dow Jones Index’s return was double double the MSCI benchmark.
Fund flow numbers for the year were over $60 billion positive and $10 billion negative for the respective fixed income and equity asset classes, with retail support the key driver, according to data trackers. On a regional basis, Asia was the best stock performer as its top export technology was also the leading sector. Europe and Latin America lagged from crises in Turkey and Argentina, while the latter experienced a broader setback as civil unrest over stagnant incomes spread throughout the continent. In structural reform, India as a standout example lost luster as it threatened new taxes and restrictions and grappled with non-bank collapse into Prime Minister Modi’s second term. In China second-tier banks were rescued but wider feared carnage did not materialize, but in 2020 economic and financial sector woes must be handled more decisively if fund managers are to retain faith in immediate fundamentals and the longer term major emerging market story.
So-called frontier markets were more judged on individual merits in 2019, with a mixed outcome. Dedicated mutual funds showed outflows, and their returns exceeded the index on external sovereign debt but lagged the equity core universe. Central Europe had this split result, as Ukraine bonds rallied after presidential and parliamentary elections but stocks slid. In the Middle East, the landmark Aramco oil company flotation valuing it at $2 trillion on the Saudi Arabian bourse grabbed headlines, but attracted only local buyers as foreign ones questioned governance and transparency. Lebanon was at the bottom of performance ranks as street protests coincided with bank runs, exchange rate depreciation, and possible debt default. In Africa Kenya’s 40% jump was an exception to disappointments elsewhere, including a decline half that size in Nigeria. The region was virtually alone in promoting a breakthrough direct and portfolio investment narrative, as a 40-member pan-African free trade agreement was signed, which will be under scrutiny this year for initial implementation.
While traditional metrics did not meet an affirmative test or got benefit of the doubt last year, the renewed screening bar going forward will be complicated by acceptance of ESG criteria as important allocation factors. Environmental, education, health, and corporate and government integrity issues increasingly feature in analysis, amid launch of new industry associations and category benchmarks. Green bonds, including from emerging markets China, Korea and Brazil, have grown to $250 billion outstanding despite continued issuance classification and cost difficulties, as global mainstream investors pledge higher exposure. The Ebola virus resurfaced in Africa, and the swine flu epidemic in Asia is a lingering concern. In Latin America the Venezuelan displacement crisis reached historic proportion as millions flee economic and social misery for neighbors caught in their own poverty and rule of law vise. For 2020 the United Nations requested over $1 billion in international aid, as a previous appeal for half that amount fell short. December‘s Global Refugee Forum in Geneva urged private finance to help fill the gap, previewing future contours of the emerging market selection matrix. Winners this year could be countries like Colombia, intent on preserving an investment grade rating with fiscal discipline steps and displaced population funding innovation, as the asset class lure turns more creative and insistent.