U.S. President Donald Trump's move last week to slap up to $60 billion in tariffs on some Chinese imports has since provoked a warning from Beijing.
KUALA LUMPUR: Schroders Investment Management expects emerging markets (EM) equities to recover this year after a challenging 2018 as a weaker US dollar would be positive for dollar borrowers and EM.
Its chief economist Keith Wade had on Thursday named the return of EM as one of his themes for the year.
He said: “If our forecast is correct and the US Federal Reserve decides to end its interest rate tightening cycle in June 2019, there is a good argument to be made for the dollar to weaken. This would relieve the pressure on dollar borrowers and emerging markets.
“Arguably, those markets may already be discounting the worst, with both equities and foreign exchange having fallen significantly.”
However, Schroders said expectations for major global central banks to take further measures to tighten monetary policy and the impact of the US-China trade dispute would not help.
Wade pointed out macroeconomic developments would be important, and it might be that further stimulus in China is the catalyst for investors to return to the region.
He believed this would help to alleviate concern over another collapse in global trade as seen in 2007-2008.
“Whilst US-China trade will slow, unless the trade tension goes global there is no reason to expect an outright contraction in trade as activity should be diverted elsewhere,” he said.
For last year, the MSCI Emerging Markets Index, a measure of emerging markets (EM) equities, was down 14.3% in 2018, but this masked a considerable dispersion of returns, particularly in US dollar terms.
Turkey was the year's worst performer, thanks to a collapse in the lira, with equities losing investors 57.6% in dollar terms.
The best performing major market, Brazil, was still down for the year, but only just at a less painful
0.2%.
The outlier was Qatar, where the equity market rallied 29.8%, despite the ongoing economic blockade by regional countries.
Schroders said the dominant common theme for EM equities in 2018 was trade tensions.
Its emerging markets economist Craig Botham explain that taking April, when the US first mooted China-specific tariffs, as a starting point, there was a striking correlation between equity performance in EM and a country's exposure to the US-China trade tension, as measured by value added to China-US trade.
“The less exposed economies managed to eke out small positive price gains, but due to currency moves still saw a negative overall return in dollar terms,” Botham added.
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