A new year ushers in new opportunities and 2020 is no different in that respect. Emerging markets debt is one such opportunity, according to the global fixed-income team at Morgan Stanley Investment Management. In its new report, MSIM sees “attractive opportunities in countries displaying disinflationary or stable inflation dynamics and offering generous real rates.”
Likewise the currencies of such countries offer opportunities. They may be undervalued as they were relative laggards against the dollar in 2019. Foreign exchange opportunities could arise in countries on the sunny side of a cycle, or in those showing “robust external accounts.”
What about the emerging market corporates? MSIM sees a benign macro outlook for the issuers, and the exercise of managerial discipline. These factors lead to team to infer that default rates will be limited.
Despite such opportunities, though, and on balance, risks are skewed to the downside. On trade issues, optimism has already been priced in. For example the formalization of the “first phase” UC/China trade deal in the coming days, which was announced in October, won’t add any upside to the markets. Meanwhile social tensions in many emerging market countries are on the increase, and the appropriate pessimism may not yet be priced in.
More on the First Phase
The report has more to say about the trade deal. The agreement is scheduled for a signing ceremony at the White House on Jan. 15. President Trump has said that “at a later date” he will go to the People’s Republic of China and talks will begin on the second phase.
The MSIM team has contained its enthusiasm for this outbreak of peace. It is not clear whether the first phase even rolls back the tariffs already in place. Further, the prospects for any second phase progress look dim, as the conflict goes far beyond trade disputes proper and takes in China’s developmental model, military positioning, and a competition for dominance in critical technologies. Neither party is inclined to compromise on any of these points, and without addressing them one does little to address the uncertainties that bad blood between these two nation states creates for the emerging market nations.
Further, the coming year will be dominated on the US side by a presidential campaign, and it is not at all clear that any outcome of this campaign will produce a presidency whose views of the US-China relationship would itself induce greater certainty in the market about this relationship and its implications.
Asia and Latin America
Speaking more generally, the report suggests that the PRC’s growth will likely slow in the months to come, but Asia ex-China could pick up the slack given monetary stimulus and fiscal easing, especially in Malaysia and Indonesia. The government in Malaysia plans to implement a targeted fuel-subsidy program. Meanwhile, Indonesia may relax the cap on its deficit, which would allow it to use Keynesian counter-cyclical measures to support the economy.
Meanwhile, in Latin America, the government of Brazil is committed to reforms that could allow for sustained growth.
The MSIM team is optimistic about Brazil, and it is guardedly optimistic, too, about Mexico and the Andean nations. Although each has seen “years of weakening growth and rising inequality,” they may now be in a better position than they have been of late to address their difficulties. In Mexico in particular, the export industries have shown unexpected strength in 2019, and this could augur well.
Thoughts on Russia, etc.
Russia, like Mexico and Indonesia, has experienced subdued inflation and generous real rates. It also has solid external balances and growth. So the Russian ruble could be a valuable play in 2020.
Russia is also spending money on infrastructure and easing its monetary policy: both positive developments in the eyes of the MSIM team.
The economies of other countries in Eastern and Central Europe could slow.
The team expects Turkey to employ monetary stimulus and “other heterodox policies” to rebound, through it is concerned that this will jeopardize “recent gains in macroeconomic rebalancing there.”
The bottom line is that the team “subpar global growth” for 2020, with a global backdrop that is “only marginally better” than it has been in 2019. Emerging market debt investors will have to pick their spots with care.