Emerging markets outlook: on the up
12 November 2019
By Henk Potts, Senior Investment Strategist
Will easier policy from key central banks help set the scene for more buoyant growth in emerging markets next year?
Emerging markets (EM) in 2020 will remain vulnerable to the vagrancies of the global economy. Moderating growth in the US, Europe and China will continue to filter through to reduced demand for EM products and services. The development of trade negotiations, sanctions, energy prices and domestic political conditions will also determine the fate of EM economies over the next year.
Swings and roundabouts
While global growth has suffered from trade wars, certain EM economies have profited by capturing US-China trade flows. Among those often cited as beneficiaries of the trade diversion are Vietnam, Malaysia and Mexico.
Rising tension in the Middle East, has led to concerns around the risk of a prolonged period of elevated oil prices. Spikes in energy prices could represent both a risk and an opportunity for EM. EM Asian economies are in aggregate importers of energy, while a higher oil price would benefit the Eastern Europe, Middle East and Africa region.
EM have prospered from the pivot to policy easing from key central banks in 2019, which has improved liquidity conditions. Inflation across most EM countries is low by historical standards and expected to decline further. This provides central banks with more room to ease policy and stimulate growth.
After a specifically disruptive political backdrop for many EM during 2019, hopes of stability in certain key economies should help to provide a more stable backdrop in 2020. A re-acceleration in growth could be on the cards for economies whose fundamentals remain strong and will be supported by fiscal and monetary policy such as India, Brazil and Russia.
A re-acceleration in growth could be on the cards for economies whose fundamentals remain strong.
The estimated 6% growth rate that India achieved in 2019 was the slowest in seven years. Weakness has been driven by lower levels of private consumption, held back by lacklustre income growth. However, the material reduction in policy rates, easier liquidity, reduced corporate taxes and improved weather conditions suggests that growth will recover to 7% in 2020. In order to stimulate long-term growth, the government must implement policy changes aimed at boosting investment, attracting capital and financial reforms.
Russia benefits from a solid macro framework, with high levels of international reserves and low external debt. Its economic outlook benefits from a conservative fiscal policy and improved tax administration which has generated a budget surplus. Unemployment has improved and real wages are rising. Inflation has surprised to the downside and the central bank has aggressively cut rates, with more expected in 2020.
However, the possibility of US sanctions continues to pose a material risk to Russia’s growth prospects.
Confidence in Brazil’s economic outlook has improved with pension reform and the releasing of funds held by employers in case of unfair dismissal. Recent data shows there has been a positive contribution to growth from both supply and demand. We forecast that Brazilian growth will improve to 2.1% in 2020 from an estimated 1% in 2019.
While growth forecasts for advanced economies have been falling, emerging markets, excluding China, should provide a source of improvement in 2020. Investors, as always, will need to be very selective on regions and cognisant of risks.
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