Both stocks and currencies in emerging markets (EM) have been under pressure in the past few weeks. Some might put this down to the “Sell in May and Go Away” syndrome which argues that, as warm weather sets in for the northern hemisphere, low volumes and the lack of market players can lead to a lacklustre market. Certainly, EMs tend to suffer large downside moves during this period, but is there more to the story this time?
EMs are not in a particularly good space at the moment, in part due to the fallout from the US-China trade war, but more specifically because of declining growth in both developed markets and EMs. A significant number of EM central banks have begun to cut rates in an effort to avert recession and boost growth.
Brazilian data is forecast to show below-target inflation, increasing the probability of further rate cuts. The local interest rate market is pricing in cuts totalling 75 basis points (bps) by December this year, with the economy likely to have fallen into recession in Q2 2019. Further south, Argentina’s Economy Minister, Nicolas Dujovne, resigned over the weekend. He led bailout negotiations with the IMF last year and his resignation follows Mauricio Macri’s defeat on August 10 to leftist Alberto Fernandez. Mexico cut rates last week for the first time in five years, and may do so again in September.
Africa and the Middle East
Egypt is expected to cut rates by as much as 100 bps, while at the other end of the continent Africa’s most developed economy, South Africa, remains under severe pressure. The Rand is this month’s worst performing EM currency and efforts to kick-start growth are not gaining traction. Turkey’s GDP is expected to fall by 0.5% in 2019. Benchmark rates were cut by a whopping 425 bps in July, and further cuts are expected.
India, the Philippines and Thailand all cut rates earlier this month, and Indonesia will announce its decision on Thursday. China has announced new measures to support its economy, with the central bank announcing a key interest rate reform over the weekend, a move which is hoped to provide a platform for lower corporate borrowing costs. Thailand reported its Q2 growth figures earlier today with GDP slowing to a five-year low, primarily due to a curb in Chinese growth. The US-Sino trade war remains the broader macro driver for the region currently, with a number of trade-based Asian economies seeing growth stumble in 2019. Hong Kong and Singapore reported their worst quarterly GDP figures in more than a decade and economists expect that both will fall into recession later in the year.
Current data paints a bleak picture going forward, with the forces of global growth which previously supported so many EMs, such as trade, supply chains and the commodity super cycle, now petering out. What will drive growth in these markets in the near future is the next big question. Strong growth in these regions is an imperative, given wealth discrepancies and population growth. As a group, EM figures have been significantly distorted by the performance of China and India. Stripping these figures out, IMF figures reveal growth in per capita output as being lower than that of developed markets since 2015. This does not necessarily mean that EM investment opportunities are over, but rather that the level of return is likely to moderate.
Both Brent and WTI continue to be driven by global growth concerns and trade wars. Yield curve inversion on US Treasuries last week raised concerns over looming recession risks and weakening global demand. The yield differential between 2-year and 10-year US Treasuries turned negative for the first time in twelve years. This yield differential has been a leading indicator for oil demand growth, and based on historic performance the inversion suggests oil demand will plunge within the next two years. Lower oil prices would favour EMs but overall growth dynamics are likely to outweigh any oil price gains.
By Lionel Kruger, Director at JCRA