As part of the IMF and World Bank annual autumn meeting, numerous (virtual) events were being held on the topic of emerging economies. Let us summarise the most important issues and findings for emerging markets investors.
The biggest risks perceived for the emerging markets are less of an idiosyncratic (i.e. individual) and, not surprisingly, more of a global nature. Above all, the normalisation of the monetary policy, driven to a large degree by the US central bank Fed, will affect the emerging financial markets. This goes in tandem with worries about inflation and the interest rate hikes that have already started. It is followed by the global energy crisis, the so-called commodity super-cycle, and concerns about economic growth, which are largely derived from the reorientation of the Chinese economic policy.
Change of course in China’s economic policy
The change of course in China’s economic policy along the lines of the Common Prosperity maxim is expected to cause economic growth in China to slow down possibly below +5% per year in the coming two to three years. The participants at the annual meeting expect the Communist Party to intervene more prominently again in the politico-economic arena. The Party has already announced stronger fiscal stimuli. So far, however, nothing specific has materialised. The goal is to double GDP per capita in the coming 15 years. We are yet to see relations between the USA and China improve. Instead, we do notice a solid degree of scepticism across the aisle in the USA, even after Trump. That being said, the attitude of investors vis-à-vis China is generally positive.
Global interest rate hikes make refinancing harder for emerging economies
Global interest rate hikes make refinancing harder for emerging economies. The covid crisis has caused debt levels to rise in most emerging economies, but the absolute numbers are below industrialised levels. The level is considered administrable and not problematic to the system. Moratoria of payments by states and companies are not regarded as immediate risk. At the meeting, almost all emerging economies presented programmes aimed at cutting their debt. At the moment though, only oil-exporting countries have wiggle room for tax incentives. As for monetary measures, many emerging economies are ahead of the developed economies and have already started their cycle of interest rate increases. For example, the Russian central bank reacted to the high rate of inflation by raising its interest rates by an unexpectedly substantial degree in October.
Successful refinancing on the local market
Emerging economies can – and do at increasing rates – successfully resort to local capital markets for refinancing. Real interest rates remain negative especially in Latin America.
The frontier markets, a new segment of emerging markets, seem largely over-invested. Those are relatively small, less liquid markets. In this segment, investing has to be done very selectively. Here, energy exporters have a more interesting risk profile.
Left populism in Latin America
In Latin America, we can see a tendency towards left populism, as substantiated by the recent presidential elections in Peru, Ecuador, and Nicaragua. The imminent elections in Columbia and Chile are also likely to swing left. To be fair, the aforementioned countries have/had been run by weak governments with insufficient representation in their respective parliaments, which are strongly fragmented. This results in a lack of leadership on the one hand, and in a reduced risk of traumatically unorthodox economic policies on the other hand.
Unfortunately, the G20 common framework (i.e. debt reduction programme for the poorest debtors) has remained rather without bite so far. Here, there is a clear need for acceptance and technical understanding. In an investor survey, all emerging markets asset categories were considered under-invested. From a technical perspective, this aspect should be an advantage.
Prognoses are no reliable indicator for future performance.