In the last post of my first blogging year I have decided to blatantly steal the idea from the great Bill McBride. He asked 10 most important questions for 2014, focusing mostly on the US. They are all very valid and probably triumph anything else but nonetheless this is my list for emerging markets:
1. Will rates in China continue to grow?
I disagree with those who think that the only reason behind the EM carnage this year has been the tapering fear. Since the middle of the year the situation in the Chinese money market has been very delicate and dangerous. In the last days the squeeze has intensified which begs the question will China be able to orchestrate tighter money market conditions after the massive build-up of credit in recent years.
If you’d like a nice overview of the situation, do read George Magnus’ comment in the FT.
2. Will the renminbi continue to rally?
Very few things have been trending in the EM in the last year. Importantly, however, the CNY (or the CNH) has enjoyed a tremendous rally, basically without looking back. Now, in 2014 there are still trade balance related reasons to expect some more appreciation but a one-way traffic in the Chinese FX only encourages the rest of the world to lend money to China, which is against the theme I mentioned in Question 1.
3. Will The Great Rotation apply also to EM?
Everyone is talking about, broadly speaking, selling US Treasuries and buying S&P500 by big asset allocators. I don’t want to go into whether that makes sense or not but I think it is important to ask whether a similar story could happen in EM? After all, the world is still underweight emerging markets but within that position the skew is towards fixed income. And it is difficult to argue that EM equities are super expensive…
4. Will EMFX continue to disappoint?
The last several years have seen EMFX performing poorly. The reasons were related to shrinking growth differential between DM and EM (and hence equity flows). It does appear, however, that the differential has stopped shrinking so perhaps the EMFX will behave a bit better?
5. Will default risk in EM stay low?
With the exception of the usual suspects (Argentina, Venezuela and Ukraine) there haven’t been any worries about sovereign defaults in EM. The underlying fiscal position in EM is quite good so this should not change, unless of course the private sectors (and banks) need bailouts after the big increase in debt in recent years.
6. Will the Terrible Five make it?
Brazil, Turkey, South Africa, Indonesia and India have been in the eye of the storm this year. The pressure is still on and the responses of authorities have varied from Rajan’s holistic reform approach in India to Basci’s never ending ignorance in Turkey. In order of fighting chance to make it I go for: INR, BRL, ZAR, IDR and TRY.
7. Will Russia join the Bad Boys Club?
There’s been nothing going on for Russia lately. Growth slowing, current account reversing, fiscal situation deteriorating, commodity prices refusing to grow… If it wasn’t for quite low public debt, Russia would be in serious trouble by now. But it is definitely headed in the wrong direction.
8. Will EM be able to “buy more stuff” or will they struggle with disinflation?
Mario Draghi says that the current kind of disinflation actually boosts the disposable income, as it is effectively a supply shock. I agree. That said, the risk is that low inflation has set across the EM spectrum, which could really make it more difficult for some of them to grow.
9. Will Central Europe continue to outperform?
A forced adjustment right after the crisis has left CEE as the most stable sub-region among emerging countries. Bank deleveraging is more advanced than anywhere else and balances of payments have improved drastically. On top of that growth is really picking up (in a non-inflationary manner, too!). This sets the stage for another year of outperformance but will it happen?
10. Will EU periphery intercept the stream of investments into EM?
I know, I know, even Ambrose Evans-Pritchard or Wolfgang Münchau couldn’t say that EU periphery is part of emerging markets already. However, in my opinion they have become a serious competitor for capital against some of the biggest EMs, who have witnessed a dramatic loss in competitiveness in recent years. With global growth increasing, chances are that the FDI pool will rise too. Perhaps instead of targeting Brazil investors will go to Portugal? Or instead heading to Turkey they will choose Greece?
These are the 10 things on my mind as far as emerging markets are concerned.
And in the meantime I wish you a very Merry Christmas and a fantastic New Year! Thanks for reading the blog and leaving a valuable feedback.
See you in 2014!!!