Global central bankers, ministers of finance and representatives from the
private sector and civic groups gathered in Washington, D.C., last week for
the Annual Meetings
of the IMF (International Monetary Fund) and the World Bank Group.
Below are 10 key investment takeaways gleaned from this year’s discussions.
1. The outlook for emerging markets (EM) remains constructive. Investors
point to improvements in growth, lower inflation and contracting current
account deficits as evidence of EM’s resilience to global shocks.
2. Despite a bullish stance overall in emerging markets, positioning does
not seem to be stretched. Investors are reluctant to be overly long given
macro risks but are also loath to reduce risk for fear of missing out on
further upside. Investors are favoring EM local debt given its relative
value versus developed-market bonds and its underperformance versus EM
hard-currency debt in recent years.
3. In terms of risks,
China's policy stance post–Party Congress
and buildup of corporate balance sheet leverage were areas of focus,
although most investors do not expect a major crisis or “credit cliff”
Federal Reserve policy normalization
and European Central Bank (ECB) balance sheet reductions are not setting
off alarm bells.
4. Investors are unsure about the path of the U.S. dollar but
expect oil prices to stay range-bound. Commodities appeared far from top-of-mind among participants, in contrast
with what we’ve observed in many recent IMF meetings.
5. EM flows could moderate next year but are unlikely to reverse, with
further inflows expected before 2017 comes to a close. Growth in
exchange-traded funds (ETFs) and passive investing is viewed as a risk,
given their ability to act as marginal price-setters on small volumes,
6. EM central banks are meeting their inflation targets and are thus able
to act counter-cyclically (i.e., to ease while the Fed is hiking);
and Brazil, for instance, have room to loosen monetary policy further.
There was debate, however, as to whether low inflation is a locally or
globally driven phenomenon (a
point we also discussed
in our Cyclical Forum).
7. Uncertainties about the future of the North American Free Trade
Agreement (NAFTA) are increasing, and while the implications for Mexico’s
economy are difficult to quantify, a U.S. withdrawal from NAFTA would
likely crimp growth there too (Mexico is the No. 1 export destination for
six U.S. states and the No. 2 destination for another 32). The upcoming
presidential elections in Mexico next July further complicate matters, with
the path for monetary policy and the currency dependent on the outcome and
interplay of local politics and trade negotiations. Should NAFTA head for
the scrap heap, we expect Mexico to mitigate the impact by accelerating
trade agreements with EU, Trans-Pacific Partnership (ex U.S.) and Mercosur member
8. Venezuela, to quote Winston Churchill, is still “a riddle wrapped in a
mystery inside an enigma.” Hopes that President Nicolás Maduro’s
administration and his United Socialist Party of Venezuela would cede
ground to the opposition in the gubernatorial elections were dashed over
the weekend, with the Chavistas digging in their heels as a negotiated
regime change becomes more remote. Assuming timely payment on upcoming
PDVSA (Venezuela’s state-owned oil and gas company) bond maturities, the
next significant repayment “hump” is not until August 2018. Key
developments to watch will be the path of U.S. and European sanctions and
the rapid contraction of oil production (the country’s key source of
foreign currency for imports).
9. While the cyclical upswing in Latin America is spreading and becoming
more synchronized, reform momentum is more divergent. Participants expect
Brazil to keep pushing ahead with reforms before next year's elections and
Argentina to refocus on fiscal and structural measures once the October
midterms conclude. Investors were most bullish on Latin America among the
emerging markets, with the majority expecting to add risk near-term in the
region’s local markets and hard-currency debt.
10. Outside of Latin America, countries with an IMF lifeline, particularly
Egypt and Ukraine, remain in vogue but face close scrutiny given the extent
of investors’ involvement. Policymakers in Sub-Saharan African nations
painted a mixed picture, indicating that when the tide of EM inflows goes
out, there will likely be plenty of dispersion in how these countries
In sum, we think risk assets are likely to grind higher (uncertainties in
Mexico notwithstanding). Having said that, global policy shifts and
geopolitics may test the current low volatility and provide attractive
entry points into the asset class. We think investors will do well to stay
liquid and keep dry powder to take advantage of dislocations.
For more of our views on global economies and markets, see our latest
Cyclical Outlook, “As Good as It Gets.”
Yacov Arnopolin, Lupin Rahman
are emerging markets portfolio managers and contributors to the PIMCO Blog.