Oil, populist leaders and US rates: a guide to emerging-market 2019 risks

Emerging markets are tentatively picking themselves up off the floor after a rout that wiped about $5-trillion off the value of stocks since January. But the reprieve may not last long.

Rising interest rates in the US, a stronger dollar, Beijing and Washington’s trade war, lower oil prices and the emergence of populist presidents in Latin America’s two biggest economies could all weigh on markets.

“The theory is dead simple: emerging-market assets have already bombed, so the downside, if things get worse, is much lower and if things recover they have greater potential to perform,” said Anthony Peters, an independent analyst formerly at Blockex in Chipping Norton, UK. However, “they have the potential to go much lower for much longer than anybody had ever thought possible”.

The Fed and the dollar

Investors will be carefully watching the US Federal Reserve after chair Jerome Powell was not as dovish as they had hoped in comments following the central bank’s latest interest-rate increase.

Added to that, the European Central Bank is set to end asset purchases that have pushed billions of euros into higher-yielding markets such as Poland and Hungary. That may force Eastern Europe’s central banks into rate increases they’ve long resisted.

In emerging Asia, economies that are heavily reliant on foreign investments such as Indonesia will continue to face the challenge of maintaining currency stability and stemming the risk of outflows.

Trade wars and China

Chinese President Xi Jinping remains defiant, telling some of the nation’s most influential military and business figures that Beijing will not back down quickly to US trade and investment demands. Any additional increase in tensions between the world’s two dominant economies would probably deal a blow to Asian assets. They’ve already taken a hit, with China’s main stock index on track for its worst year since 2008 and equities in South Korea and Taiwan also falling sharply.

Populists

Brazil and Mexico will start 2019 with new populist presidents, albeit from opposite ends of the spectrum. Brazilian stocks have risen to record highs after president-elect Jair Bolsonaro said he will sell dozens of state-owned companies and picked University of Chicago-trained Paulo Guedes as his chief economic adviser. Still, the right-winger faces a tough challenge reforming the country’s generous and exhausted pension system, which will be key to sustaining the market rally.

In Mexico, leftist Andres Manuel Lopez Obrador, who came to power this month, is keeping traders on edge after cancelling a $13bn airport. Some concerns have diminished amid a 2019 conservative budget plan and after bondholders accepted Mexico’s offer to buy back $1.8bn in debt used to fund the construction of the airport. Still, investors will keep a close eye on government spending to verify that the president’s proposal isn’t exceeded once the new social programmes are implemented.

Russian sanctions

Even after the US Treasury said it’s ready to lift sanctions on one of the country’s biggest companies, investors will be watching for any movement from Congress on possible penalties on Russian sovereign debt or banks. If special counsel Robert Mueller’s investigation into the Kremlin’s interference in the 2016 US election reaches a damning conclusion, that could be the trigger for new penalties.

Saudi oil woes

Brent crude’s plunge since early October to about $57 a barrel is bad news for many major developing economies, not the least Saudi Arabia. It needs prices as high as $95 per barrel to balance its 2019 budget, according to Bloomberg Economics. The economic squeeze — combined with the western backlash over columnist Jamal Khashoggi’s murder in Istanbul — means MSCI’s decision to include Saudi stocks in its emerging-market index from 2019 might not be enough to attract the investment the kingdom desperately needs.

Elections

There are plenty of upcoming polls to keep traders on edge. Indians vote in a general election in April or May and analysts at Credit Suisse Group say markets haven’t priced in the risk of a coalition government emerging, which could derail Prime Minister Narendra Modi’s economic reforms.

Thailand is set to finally hold a vote on February 24 after several delays since the governing party took over in a bloodless military coup in 2014, and investors are worried about the prospects for social unrest. Indonesia’s turn is April 17 — a rematch between President Joko Widodo and his rival, Prabowo Subianto.