Emerging Markets  

Emerging markets to benefit from policy change

Emerging markets to benefit from policy change

The outlook for emerging markets is promising given that the adverse policies implemented last year are not "sustainable", the head of research at Ashmore has claimed.

Speaking at Ashmore's biannual Emerging Markets update yesterday (February 26) Jan Dehn said the US had committed three policy mistakes in 2018 leading to a slowdown in emerging markets but these were unlikely to hamper the market going forward.

He said an "excessive fiscal stimulus when the US economy was already at full employment", a number of announcements by the Fed's chair, Jay Powell, signalling several rate hikes to come, and Donald Trump’s trade dispute with China were all to blame for a bad year for emerging markets.

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The reason was that these factors were supportive of the dollar, Mr Dehn said.

A strong dollar is generally a negative driver for emerging markets as many less developed countries borrow debt in US dollars, increasing the total amount they owe. 

Mr Dehn added: "2018 is going to go down in world economic history as ‘America’s Lawson Boom’."

The Lawson Boom refers to the macroeconomic conditions in the UK at the end of the 1980s, associated with the policies of Margaret Thatcher's chancellor Nigel Lawson.

The late 1980s were a period of rapid economic expansion but this caused a rise in inflation and a larger current account deficit. Policies to tackle this inflation caused the recession of 1991-92.

But Mr Dehn said he expected the dollar to weaken in 2019 as he believed the policies were not sustainable. 

Mr Dehn said emerging markets fixed income was generating more returns than the S&P 500 benchmark index. 

China and the US have been at loggerheads about trade policy since the US imposed tariffs on some Chinese exports last year. But both countries held talks earlier this year and showed signs of coming closer to reaching a trade agreement. 

Gregory Perdon, co-CIO of Arbuthnot Latham, agreed with Mr Dehn's outlook on the market.

He said: "We are indeed positive on EM fixed income based on accommodative fiscal and monetary responses out of China along with the expectation that US/China trade tensions will subside in the short-term."

According to Mr Dehn several Fed rate rises have already been priced into EM bond yields, even though the Fed has become more dovish in recent weeks. 

He said: "The German 10 year bond market is currently pricing in the Fed to stop hiking rates at 32 basis points and that is weird because the Fed is already at 250 basis points.

"And currently we are pricing in that the Fed stops at 546 basis points which is 21 basis points higher than where the Fed was before the financial crisis in 2006."

Alex Shaw, financial adviser and director of Progeny Wealth, said: "We are keeping a close eye on EM fixed income. The asset class took a beating last year as the dollar and US interest rates climbed.