Trump Tremors’ Makeover Mobilization
Last year’s rally in emerging bond and stock markets skidded in the final quarter, with expected and surprise US shifts as the Federal Reserve began hiking interest rates and President-elect Trump’s tough campaign currency and trade positions came into initial view. Assets sold off immediately after his upset win, with Mexico’s peso and the Chinese renimbi especially under fire from immigration and tariff threats, but recovered into the New Year as panic gave way to lingering anxiety over Washington’s new direction and developing economies’ growth and reform agendas. The main JP Morgan local and external bond indices ended 2016 up 10 percent, and the MSCI equity gauge was close behind at 8 percent. Fund tracker EPFR registered over $50 billion in combined foreign retail and institutional inflows, with a record $40 billion into fixed-income spurred by industrial world negative yield aversion. Despite recession, Brazil and Russia bouncing off 2015 crisis bottoms were standouts, while Turkey portfolios were slashed in the coup attempt aftermath and frontier share markets were also big disappointments with a flat composite index. For years investors have tended to look at relative global asset class and valuation rationales rather than emerging market merits themselves for inspiration. With the looming Trump test and quantitative easing fade, 2017 could continue the pattern of indirect judgment but governments and companies may finally be motivated to seize upon underlying policy and performance supports missing for the last decade.
On the macro-economic front, the IMF recently changed its forecast but both GDP growth and inflation remain stuck at 4 percent, double the advanced economy average. Monetary policy must contend with higher world interest rates and another likely depreciation bout against the dollar after mixed results in 2016. Fiscal positions may be equally constrained with prevailing deficits, as both state and private banks curtail double-digit credit expansion with rising bad loan ratios and recapitalization needs. In external accounts, trade could plummet in the short-term with “war” outbreaks but is in secular decline anyway in measurable goods and services, according to the WTO. Cross-border remittances from the Gulf in particular are also slowing, while FDI should be steady as many recipients like China become even larger source countries. Agricultural, energy and industrial commodities have rebounded but are far from former peaks, and infrastructure projects may face more competition as the US, Europe and Japan ramp up spending after relative austerity. Asian and Middle Eastern economies continue to hold trillions of dollars in reserves but increasingly must turn to foreign borrowing as backstops against persistent capital outflows. Standard and Poor’s sovereign ratings picture for twenty large emerging markets, with the exception of Indonesia, is universally for downgrades, with South Africa soon due to lose its top-quality ranking.
By asset class trends have also been uneven, with China “A” shares left out of the MSCI index still at a major discount to the S&P 500; sovereign bond issuance doubling with Argentina’s return and Saudi Arabia’s entry; and corporate debt activity again hitting $300 billion last year despite a 5 percent high-yield default rate focused on Latin American names. By region, favorites stumbled like India in Asia after its seizure of large denomination banknotes and national tax delays. In the Middle East/Africa, Egypt drew fresh interest after ending its currency peg and receiving $12 billion in IMF support, while Nigeria was removed from the local bond GBI-EM index for foreign exchange access limits. Even before Mexican and Chinese securities were battered by President Trump’s rhetoric their state enterprise reform and presidential leadership stories flagged, and they will be among the key destinations in the spotlight for potential debt and productivity turnarounds to restore positive momentum. Emerging markets as a whole, a decade after escaping financial crisis, face a credibility crunch that can best be addressed by their own structural and systemic leaps, including in next generation liberalization and privatization, regardless of outside circumstances. This year’s winners, likely in small and mid-tier markets as the more unwieldy BRICS continue to struggle, can make the category great again.
