Aside from all the mid to late cycle signs, the end of global quantitative easing policies should also play a central role. US balance sheet reduction alone should not be disruptive for markets, but when it is added to the Bank of Japan’s tweaking of the yield curve control and the European Central Bank's taper later in 2018, it could create some volatility in core markets such as South Africa, Turkey, Brazil and Argentina.
On a political course
There is no hiding from the fact that 2018 marks a full-on political calendar, which could either spur or weaken the EM improvement story.
In Brazil, the upcoming general election poses a lot of uncertainties as corruption scandals continue to hurt the current government, which provides a favourable environment for a populist politician or an outsider to step in.
The importance of this vote is amplified by the need for social security and other reforms to fix a concerning fiscal outlook and put the economy on the right growth track.
Similarly, in Mexico, upcoming presidential elections in the summer look to be favourable to populist Morena candidate Andrés Manuel López Obrador and there are additional political risks stemming from the ongoing North American Free Trade Association renegotiations.
While in South Africa, Cyril Ramaphosa’s win in the ANC elections in December was an encouraging sign for the markets, but a lot of Jacob Zuma’s loyalists remain in the ANC leadership, potentially slowing any reform momentum. In Turkey, the situation remains uncertain and is a political risk story that will most likely continue to put investors on edge in 2018.
Investors are without a doubt faced with an environment that will have shifting economic conditions over the next year.
We feel confident that the fundamentals for investing will improve in EMD. This could be joined by a backdrop of economic growth and manageable inflation levels, which should keep company earnings, and therefore debt servicing, in a positive situation. This will help investors weather any potential surprises in interest rates, geopolitics or central bank policies.
Pierre-Yves Bareau is head of emerging market debt at JPMorgan Asset Management