Volatile times for emerging markets

Risk assets and oil prices may be hit, taking down currencies of commodity producing countries, especially the Russian ruble, Colombian peso and ringgit, according to Bloomberg.

THE Federal Reserve’s abrupt change to zero rate hikes for 2019 against a softer growth outlook, may not benefit emerging markets (EMs).

Contrary to earlier expectations for EMs to recover on a weaker dollar, slowing global growth may dent exports from EM economies.

The Fed’s rate hike pause should lead to a weaker dollar but due to its yield advantage, the greenback may stay quite strong.

Expectations for the “death of the dollar” were beaten back last Thursday when the Bloomberg Dollar Spot Index recovered all its losses incurred the previous day.

The dollar is still considered the most attractive currency within the Group of Ten comprising Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, Britain and the United States.

The slowdown in Europe renders the euro less appealing; Japan still has negative rates and the pound is suffering from Brexit woes.

Some still expect EMs to re-establish themselves to be the prime destination for capital temporarily lost to the United States but markets could be volatile.

“Economic and earnings growth are expected to be stronger, while lighter investor positioning and depressed multiples, all bode well for EMs to deliver positive, absolute returns and outperform their developed peers,’’ says Anthony Dass, head of AmBank Research.

For the EM and developing economy group, the International Monetary Fund expects growth at 4.5% in 2019 and to improve to 4.9% in 2020.

Growth in emerging and developing Asia is forecast at 6.3% in 2019, and 6.4% in 2020.

While lowering India’s growth forecast to 6.8% from 7.2% for fiscal year ending March, 2019, Fitch Ratings said India’s gross domestic product (GDP) growth should hold up reasonably well. Indonesia’s GDP rose above expectations to 5.18% in the last quarter compared with a year ago; investments were up 6.01%.

The GDP growth forecast for the Philippines, among the fastest growing economies in Asia, has been cut slightly by the World Bank to 6.5% in 2019, versus 6.7% earlier.

Malaysia’s economic growth is expected at between 4.4% to 4.9% in 2019. Nevertheless, India and Indonesia have current account deficits and the Philippines, high inflation.

In Malaysia, the drop in earnings has elevated stock valuations on the basis of earnings multiples to near historical highs.

While the Fed’s pause in rate hikes for 2019 will likely drive volatile capital flows to EMs, the good times may not last.

This is if the slowing global economy fails to react favourably to the Fed’s move, China’s targeted stimulus measures and the European Central Bank’s still dovish stance in not raising rates, says Lee Heng Guie, executive director, Socio Economic Research Centre.

The big shift in the Fed’s monetary policy underscores its worry over the US economy in the face of headwinds such as uncertainty over the US-China trade talks, weak data from Europe and China as well as the deadlock over Brexit.

German manufacturing, as measured by IHS Markit’s Flash Composite Purchasing Managers’ Index (PMI) fell to 51.5 in March, the lowest since June 2013.

France’s services and manufacturing sectors contracted to 48.7 in March from 50.4 in February, as measured by the IHS Markit’s preliminary composite PMI.

An index below 50 indicates contraction.

For a second consecutive month, Japanese manufacturing activity declined as the Flash Markit/Nikkei Japan Manufacturing PMI stood at a seasonally adjusted 48.9 in March. The output component of the PMI for Japan in March fell to 46.9, the lowest since May 2016.

US manufacturing activity contracted unexpectedly as Markit’s PMI dropped to 52.5 in March, the lowest since June 2017, from 53.0 in February.

A rapid pace of deceleration in the growth of developed economies will likely impact the outlook for EMs.

So will the rise of populism which hurt productivity and free trade that is conducive to growth.

Policy discipline in China is crucial as it tries to balance debt control and the need to boost domestic sentiment.

While the US economy may still look strong, the yield curve has inverted, which historically, had signalled an impending recession.

The spread between three-month (at 2.468%) and benchmark 10-year (at 2.44%) Treasuries fell below 10 basis points for the first time since 2007.

A key US six-month annualised Conference Board Leading Index of current economic activity is not yet in recession territory but at 1.6, is on the verge of turning negative.

“There are enough reasons for the market to say the United States is one step nearer to a recession, the next step being an outright rate cut,’’ says Pong Teng Siew, head of research, Inter-Pacific Securities.

If that cut is done in a panicky, “in-between” meeting mode, It would signal that a recession is just months away.

Columnist Yap Leng Kuen hopes no one spoils the soup further.