Emerging Market Economies: A Brighter Outlook for 2019? (Hermes)

Key points:

• A number of headwinds – tighter financial conditions, a China slowdown and trade tensions – created a challenging backdrop for emerging markets in 2018.
• However, emerging-market stress has been confined to countries with weak fundamentals or political instability, such as Turkey and Argentina.
• Emerging-market sovereigns should therefore no longer be considered a single asset class. Instead, they should be grouped together based on different credit qualities and their ability to pay their external debt obligations.
• Today, emerging-market economies are better placed to weather negative shocks than in the past: financial systems are more resilient; better policies have been implemented; there are fewer currency pegs; and the majority of central banks are independent.
• In addition, recent cross-border lending data (levels and growth rates) from the Bank of International Settlements (BIS) suggests that financial stability risks have receded compared to 2007.
• The reliance on US dollar-denominated credit in emerging markets is still pronounced. But there are mitigating factors: emerging markets hold substantial foreign exchange reserve.
• However, bouts of financial disruption may look different in the future. For example, the shift in financial intermediation from banks to capital markets means that the corporate sector is more vulnerable to a snap-back of long-term interest rates and increased volatility than before the global financial crisis.
• We maintain a cautiously constructive outlook for emerging markets. We believe that some emerging market economies may be well placed to benefit from a small number of tailwinds in 2019. READ MORE

Similar Posts:

• Emerging Market Companies & Governments Binge on US Dollar Debt (WSJ)
• What Makes Emerging Market Debt Tick? (CFA Institute)
• Why Emerging Markets Are Up to the Stress Test (FP)
• With China on ‘Extended’ Path to Reopening, Emerging Market Equities Will Outperform Peers in Developed Economies, Record Double-digit Growth, Allspring Analyst Says (SCMP)
• The Changing World of Emerging Markets Investing (Aberdeen Standard)
• How Asia Shapes Up 20 Years After 1997 Financial Crisis (Nikkei Asian Review)
• Disentangling EM Debt (AberdeenStandard Investments)
• Is Your Emerging Market Strategy Overexposed to These 3 Factors? (KraneShares)
• What Risks Do Emerging Markets Pose to US Economy? (Bloomberg)
• “Fragile Five” Emerging Markets No Longer That “Fragile” (AP)
• How ETFs Amplify the Global Financial Cycle in Emerging Markets (Federal Reserve)
• Emerging Market Investing: Remember Demographics and Take a Selective Approach (ThinkAdvisor)
• Don’t Fall for These Myths About ESG in Emerging Markets (PineBridge Investments)
• Emerging Markets’ Foreign Exchange Reserves Have Dipped (Mobius Blog)
• Are Investors Ignoring Growing Warning Signs for Emerging Market Debt? (RBA)