New York: Emerging markets are tentatively picking themselves up from floor after a rout thats wiped about $5 trillion off value of stocks since a high in January 2018.
But reprieve may not last long.Rising rates in US, a stronger dollar, Beijing and Washingtons trade war, lower oil prices and emergence of populist leaders in Latin Americas two biggest economies could all weigh on markets.The theory is dead simple: emerging-market assets have already bombed, so 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 Ltd., whos long covered developing nations.
However, they have potential to go much lower for much longer than anybody had ever thought possible.The Fed and dollarInvestors will be carefully watching US Federal Reserve after Chairman Jerome Powell wasnt as dovish as theyd hoped in comments that followed central banks interest-rate increase on December 19.A report said President Donald Trump has repeatedly discussed firing central bank chief, but Treasury Secretary Steven Mnuchin moved to reassure financial markets that Powell wouldnt be ousted.Added to that, 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 European monetary authorities into rate increases theyve long resisted.In emerging Asia, economies heavily reliant on foreign investments, such as Indonesia, will face challenge of maintaining currency stability and stemming outflows.Trade wars and ChinaChinese President Xi Jinping remains defiant, telling some of nations most influential military and business figures that Beijing wont back down quickly to US trade and investment demands.
Any increase in tensions between worlds two dominant economies would probably deal a blow to Asian assets.
Theyve already taken a hit, with Chinas main stock index suffering its worst year since 2008 and equities in South Korea and Taiwan also falling sharply.A US trade delegation is preparing to travel to Beijing for talks slated for week of January 7.Russian SanctionsEven after US Treasury said its ready to lift sanctions on one of Russias biggest companies, United Co.
Rusal, investors will be wary of moves by Congress.
If Special Counsel Robert Muellers investigation into Kremlins interference in 2016 American election reaches a damning conclusion, that could trigger new penalties, including restrictions on trading Russian sovereign debt or banks.Saudi Oil WoesBrent crudes plunge since early October to below $55 a barrel is bad news for many major developing economies, not least Saudi Arabia.
It needs prices as high as $95 per barrel to balance its 2019 budget, according to Bloomberg Economics.
The financial squeeze combined with Western backlash over columnist Jamal Khashoggis murder in Istanbul means that MSCIs decision to include Saudi stocks in its emerging-market index in 2019 might not be enough to attract investment kingdom desperately needs.ElectionsThere 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 AG say markets havent priced in risk of a coalition government emerging, which could derail Prime Minister Narendra Modis economic reforms.Thailand is set to hold a vote February 24 after several delays since ruling party took over in a bloodless military coup in 2014, and investors are worried about prospect of social unrest.
Indonesias turn is April 17 a rematch between President Joko Widodo and his rival Prabowo Subianto.